Global Pension Funds Shift to Real Assets for Diversification

Amid the current investment climate, pension funds are diversifying their portfolios by increasing exposure to riskier investments, including real estate and alternative assets like hedge funds.

Global pension funds are boosting allocations to inflation-hedging assets like infrastructure, real estate — though more cautiously due to office market challenges — and natural resources, as these often deliver steady income streams aligned with pension liabilities, according to SS&C Advent.

Another reason behind the increased focus on real assets is to address the heightened pressure to meet investment targets. As experience has shown that funds cannot rely on interest rates remaining high to meet their required investment returns, real assets offer a more reliable path.

Yet, strategists cautioned that while real asset classes offer the potential to generate higher returns, they also increase volatility and complexity to pension fund portfolios.

Pension funds must strike a careful balance between seeking higher returns and maintaining a level of stability and predictability in their portfolios. After all, pension funds are not merely investment vehicles but the bedrock of retirement security for millions of individuals who depend on their timely and reliable payouts, strategists noted.

As pension funds increase their allocations to real assets, they must scale back investments in other asset classes. According to the report, many funds are reassessing their significant allocations to private equity and private credit in favor of real assets.

This shift is driven by concerns over private market valuations, liquidity constraints, high fees, and difficulties in performance measurement, leading some funds to reduce their exposure to private markets while others adopt a more selective approach.