Retirement programs are increasing bets on private debt, junk bonds and real estate as negative yields pare asset growth
ByAvantika Chilkoti and Caitlin Ostroff November 7, 2019
Some pension-fund managers are venturing further into unusual investment territory as this year’s plunge in bond yields makes it harder to find decent long-term returns.
Funds are dabbling in riskier asset classes, including private markets, real-estate projects, infrastructure financing and direct lending. Some are making riskier fixed-income bets, buying volatile assets such as 100-year Argentine government bonds. Others are going farther afield, investing in greenhouses and waste management.
“How do we get those types of return in an environment with low interest rates?” said Duncan Hale, a portfolio manager at Willis Towers Watson, which offers insurance brokering, risk management and investment advisory services. He said he looks for tried-and-tested investment avenues that are “slightly outside of where you’ve seen pension funds usually invest.”
Government-bond yields, which have climbed world-wide in recent days from the lows that they plumbed over the summer, still continue to reflect historically unprecedented levels of weakness. Globally, about $12.5 trillion in debt offer subzero yields, according to Deutsche Bank Securities, though that is down from a peak of $17 trillion in August.
The giant pools of retirement money are under pressure to take on more risk following decades of declining interest rates that have chipped away at returns from their traditional bond-heavy portfolios. Those concerns have been exacerbated this year as yields on government bonds dropped sharply and central banks loosened monetary policyto stimulate economic growth.
Pension funds’ allocations to alternative asset classes rose to 26% in 2018 in the U.S., U.K., Japan, Australia, Canada, Switzerland and the Netherlands, from 19% in 2008, according to estimates from Thinking Ahead Institute, a research firm affiliated with Willis Towers. The allocation to bonds has remained steady at around 30%. That trend shows no sign of reversing, investors and analysts said.
Falling bond yields hurt pensions by lowering a key metric called the discount rate, which measures the current value of a program’s future obligations to retirees. That forces the pensions to boost their assets to satisfy liabilities in the coming years.
To help U.K. pensions generate steady returns, Willis Towers is advising its clients to invest in long-term property rental markets and infrastructure projects, as well as buying trains and leasing them to the government, according to Mr. Hale.
His fund backs a company that purchased land in eastern England for the construction of two greenhouses with a combined size of about 47 soccer fields. Those will be leased out for 20 years to tomato growers and others, and are projected to generate annualized yields of more than 6% over the period.
Another project backed by the fund involves investing in a company that collects waste from London boroughs to be burned, helping generate electricity through turbines. Local authorities pay for the waste collection, while the electricity is sold back into the grid, according to Mr. Hale. The returns are expected to be more than 5% annually over 20 years, he said.
Some pension funds are moving into emerging-market debt—which can be volatile and sensitive to political headwinds—or less-liquid assets such as real estate.
Alt AssetsEquity allocations by pension funds in seven countrieshave reduced while alternative assets have increased.