Public sector pensions in focus

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Real Assets Study 2024

In this year’s study, we canvassed the opinion of representatives from 75 government and public-sector pension schemes, representing 15 per cent of our total survey cohort. Of these schemes, 33 are based in Europe, 23 in APAC and 19 in North America.

Our survey group was tilted towards larger organisations with 47 per cent of schemes boasting assets under management of $20 billion or more, although European schemes were somewhat smaller than those elsewhere, with just 36 per cent in this larger category.

North American plans have heaviest exposure to real assets

The use of real assets by public sector schemes varied significantly according to geography. North American plans have the most exposure, with 47 per cent of schemes in the region reporting real assets make up 20 per cent or more of their portfolios. Just one of the 19 schemes reported holding less than five per cent of its portfolio in real assets (see Figure 1).

By contrast, 17 per cent of APAC schemes and 21 per cent of European schemes allocated more than 20 per cent of their portfolios to real assets. In APAC, 30 per cent had less than five per cent and in Europe the figure was 24 per cent.

Globally, 67 per cent of schemes expect to up allocations to real assets over the next two years, led by funds in Europe and APAC, while 23 per cent expect no change. Just 11 per cent of funds are planning on reducing exposure (see Figure 2).

Real estate equity most popular asset class 

Real estate equity is the most popular category of real-assets investment, accounting for 28 per cent of schemes’ exposure to real assets globally (see Figure 3). It is the most popular type of investment in all three regions, with North American funds allocating on average 39 per cent of their real asset portfolios to it, followed by European funds on 26 per cent and 22 per cent in APAC.

Infrastructure equity is the next most popular form of investment, accounting for 19 per cent of global exposure to real assets, followed by real estate long income on 12 per cent.

As for the preferred way of gaining exposure, direct investment is the most popular method, with 55 per cent of funds globally citing it as one of their top three choices. Single asset and multi-asset pooled funds were the next most popular, with the latter especially popular in APAC. In North America, the single most popular option was co-investing/club deals.

Expected returns

Our survey group is broadly optimistic in terms of the returns it expects real assets to generate in the coming years, with survey participants especially bullish when it comes to infrastructure equity. Over one, three and five-year horizons, respective weighted-average annualised returns of 5.2 per cent, 5.4 per cent and six per cent are anticipated (see Figure 4).

Schemes are also bullish on the private corporate debt market with expected annualised returns of 5.4 per cent and 5.6 per cent over one and three years, making it the best performing asset class – within both public and private markets – over each timeframe.

Real estate equity is expected to deliver 6.1 per cent annualised over five years, putting it second in terms of return expectations, behind publicly listed global equities.

By contrast, nature-based solutions are expected to deliver more subdued performance over all timeframes. However, this may be explained in part by a lack of familiarity with this nascent asset class – a third or more said they “don’t know” what annualised returns to expect over all three periods. 

Risks and barriers

When it comes to investing in real assets, the impact of high interest rates and threat of a global recession were the most commonly cited risks, with 56 per cent of schemes globally citing the former as among their top three concerns and 49 per cent the latter (see Figure 5). Liquidity risks were the third-biggest concern.

From a regional perspective, worries over interest rates were slightly more important in North America and APAC than in Europe where the threat of recession was the single biggest concern.

North American schemes were comparatively more concerned about liquidity risks, with 47 per cent citing them as among their top-three worries.

While return expectations may suggest managers are largely bullish on real assets’ prospects, it is worth noting that for many, concern over high valuations was among the biggest barriers to fresh investment. In total, 52 per cent of schemes said this was the main factor preventing them from allocating more to real assets (see Figure 6). That made it the single biggest obstacle. This concern was especially pronounced in North America with 74 per cent of schemes citing it as a top-three concern.

A further 63 per cent of schemes in the region cited the difficulty in finding suitable opportunities.

High transaction costs were another factor, especially in Europe, with 49 per cent of schemes citing it, making it the single biggest barrier to fresh investment. The difficulty in benchmarking performance was another important barrier in all three regions.

Diversification remains chief benefit, but inflation-linked income is increasingly important

Diversification was the single most important rationale for investing in real assets, with 67 per cent of funds citing it as among the three most important benefits (see Figure 7). A slightly smaller majority (60 per cent) believes diversification will continue to be one of the most important reasons to invest in two years’ time.

From a regional perspective, diversification is viewed as being a comparatively bigger benefit in North America (90 per cent cited it as among their top three reasons) than in APAC (61 per cent) and Europe (58 per cent).

Real assets’ ability to generate inflation-linked income is another important attraction, with 53 per cent of schemes citing this as among their top three motivations for investing. Again, this was an especially powerful draw for North American managers, where 58 per cent cited it as among the asset class’s top-three benefits. Other leading considerations are real assets’ ability to deliver long-term income, especially in Europe where 46 per cent of schemes said this was a major attraction, and APAC (44 per cent).

Views on sustainability

While most schemes in our cohort are paying some attention to ESG/sustainability issues, there are some marked regional differences.¹

Overall, 12 per cent of schemes said ESG/sustainability was a critical and deciding factor in investment decisions, with a further 52 per cent citing is as one of several factors they considered, and 33 per cent describing it as a growing but non-essential consideration (see Figure 8). Just three per cent of schemes, all of them in Europe, failed to consider it at all.

However, whereas 17 per cent of APAC schemes said it was a critical and deciding factor, in North America just five per cent said likewise.

The fact it can enhance risk management, that there is increasing evidence of improved financial performance, and that it presents attractive investment opportunities, were the most commonly cited factors when investors were asked to rank their top three reasons for increasing allocations to sustainable real assets.

The first two considerations drew support from 56 per cent of respondents and the third from a further 50 per cent (see Figure 9). Enhanced risk management was an especially popular choice in North America, with nearly three quarters of respondents citing it as among their top-three factors. The ability to evidence ESG/sustainability-related impact was another popular choice, especially in Europe where 46 per cent of schemes cited this.

As for the type of investments which were most likely to have a positive social and/or environmental impact, climate-transition-aligned investments in real estate and infrastructure was the most popular choice globally, with 59 per cent of schemes placing it in their top three choices. Urban regeneration infrastructure projects came next on 57 per cent, followed by social infrastructure projects.

From a regional perspective, climate-transition-aligned investments in real estate and infrastructure was an especially popular choice in Europe, where 64 per cent of schemes ranked it in their top three, and APAC, where 61 per cent did likewise. In North America, social infrastructure projects was a comparatively popular choice (63 per cent), while in APAC nature-based solutions such as forestry was a comparatively important consideration, ranking in the top three with more than half of schemes.

When asked about their organisation’s policy on making a commitment to achieving net-zero emissions, just nine per cent of schemes said they were already reporting on their progress (see Figure 10). While most of the rest of the schemes polled were at varying stages along that path, 13 per cent said they had no plans to make any commitment, with North American schemes most likely to be apathetic (26 per cent).

Manager preferences

In terms of the most important factors behind manager selection, schemes ranked a manager’s ability to deliver investment performance most highly, with 71 per cent saying this was either important or very important. This was especially true in North America, where 79 per cent of schemes described it as such.

Managers’ ability to evidence risk and/or impact was the next most important factor, with 65 per cent of schemes saying this was either important or very important, led by 70 per cent of APAC schemes.

The next most important consideration was the quality of the ESG/sustainability integration process, with 61 per cent of schemes saying this was important or very important. This was comparatively more important in APAC (65 per cent) than Europe (58 per cent).

In the main, most schemes appear happy that their chosen managers are delivering on these objectives. For example, 69 per cent described themselves as either satisfied or very satisfied in terms of their manager’s investment performance record.

The corresponding figures for the ability to evidence risk and/or impact and the quality of the ESG/sustainability integration process were 76 per cent and 85 per cent respectively.

As for the most material risks to investing in sustainable real assets, the difficulty in evidencing or measuring positive impact was a concern for 53 per cent of schemes, followed by high valuations (49 per cent) and greenwashing and unsatisfactory performance, both on 45 per cent.