Savers whose retirement funds are invested only in "conventional" assets could be missing out, according to a new study by pension specialist JLT Employee Benefits. The research suggests that allocating 20% of portfolios to illiquid alternative investments could boost the value at retirement of the typical fund by up to 12%.
Investments in this category include private equity, private debt, infrastructure and real estate. Many occupational pension funds routinely ignore these asset classes, notes JLT, focusing instead on listed equities and bonds. Savers with private pensions also rarely invest in alternative assets.
The argument for investing more in alternatives lies in the diversification benefits they provide in other words, history suggests they do not move in the same direction as more traditional assets.
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So by adding these assets to the mix, pension-fund managers should be able to reduce the total risk of the portfolio while boosting expected returns.
Over time, the impact of such a shift could be very significant. JLT's models suggest that a pension fund invested 80% in listed equities and 20% in a mix of alternatives would deliver
8% more over 35 years thanan equity-only portfolio.If the alternatives portion was entirely invested in private equity, that outperformance would increase to 12%.
Watch your timing
Remember too that this is historic analysis. Pension funds have a tendency to start paying attention to asset classes when they are expensive, rather than cheap, and many would argue that private equity, for example, is in something of a bubble right now. The government not known for its good market timing is also keen to encourage increased investment in illiquid assets, partly to boost the capital available to privately owned companies in need of funding. Last month it issued plans that would allow small occupational pension funds to co-invest in alternative assets.
With all this in mind, illiquid assets can be worth a look our story on timber this week (see page 24) offers one good example of the potential benefits on offer.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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