US public pensions’ over- and under-allocations to various asset classes could mean billions of dollars flowing into real estate, private equity, real assets and other alternative asset classes in the near future, according to data from eVestment’s Market Lens Asset Allocation Trends report.
The report, which pulls data on US public pension allocation plans from eVestment Market Lens, finds that public equities account for the largest current allocation among these pensions, representing 43.93% of the total on an asset-weighted basis. Fixed income comes in at No. 2, representing 24.00% of total allocations. And according to Market Lens data, pensions are over-allocated to both, which could mean big money flowing to other asset classes as these pensions seek to meet their allocation goals.
For instance, the biggest asset winner could be real assets, which is under-allocated by about $48.91 billion (see page 4). Real estate could be the largest subcategory asset winner among the real assets group, with the potential of more than $25 billion flowing into real estate investments. This category also includes infrastructure, commodities and energy/natural resources, all of which could also see positive asset flows.
Other interesting data from the new report includes:
- Private equity investments are under allocated by pensions tracked in Market Lens by just over $19 billion. Thus, private equity managers, who have already seen rising interest and asset flows over the last few years, should expect more money to come their way.
- Smaller U.S. pension plans – those with less than $10 billion in assets – are currently more under-invested in private markets than larger U.S. plans. Given the exuberance around private markets and private equity investments, these plans should be especially careful in their due diligence processes to ensure they make smart choices while playing catch up.
- The news is also good – but not great – for hedge funds and multi-asset investment opportunities, which combined could see about $3.24 billion in new investment from plans under allocated to these segments.
Overall the report points to continued inflows to alternative investment options like private equity, private debt and real assets – although public equity and fixed-income investments will continue to dominate the industry. And when looking at gross flows (pages 9 through 11) there is still plenty of money moving into equity and fixed-income strategies across the board.
“These asset flow trends will undoubtedly impact the industry as research, due diligence and reporting requirements among allocators and managers continue to evolve to reflect the needs of these public pension plans that are stepping up their private markets investments,” said eVestment’s Global Head of Research Peter Laurelli. “And the sheer volume of money that may flow into these asset classes will also impact hiring at these investment firms, the size of deals they are able to put together and more.”