RE mandates among UK pensions drop to 2003 levels

British pension funds diversified their portfolios by investing 40% more in private equity and 30% more in hedge funds in 2008 over the previous year. Real estate fared less well, however, with mandates dropping by 25%.

UK pension funds decreased their allocations to real estate by almost a quarter in 2008, compared to a year earlier, research by investment consultancy Watson Wyatt has found.

Despite British pensions increasing their exposure to other alternative asset classes, such as private equity and hedge funds, in 2008, real estate was one area where they cut back.

“While real estate has evolved considerably in a relatively short period of time, 2008 did not represent good time for allocations in this area,” Craig Baker, global head of manager research at Watson Wyatt, said in a statement.

The consultants found that pensions increased their private equity and hedge fund allocations by 40 percent and 30 percent respectively in 2008, compared to 2007.

The 40 percent increase in private equity allocation was due to larger funds implementing their diversification strategies directly rather than via funds of funds, the research found. As a result of this there were more direct allocations to private equity funds than funds of funds allocations in 2008.

Hedge fund investment by UK pensions went up by 30 percent year-on-year in 2008, but hedge funds of funds did less well, with their mandate percentage dropping from 44 percent in 2007 to 35 percent in 2008.

“Diversification using alternatives is commonplace, but it comes at a price with large demands on governance budgets and high fees,” Paul Trickett, European head of investment consulting at Watson Wyatt, said in a statement. He said that more pension funds are realigning their fee structures and raising their game by adding to governance or moving to lower cost solutions.

The research was conducted by UK-based Watson Wyatt Investment Consulting, which serves a client base of more than 500 funds with assets worth over $1 trillion, according to its website.