by Andrés Ramos, Content Marketing Specialist – eVestment Private Markets
Published annually, the U.S. & U.K. Public Plan Asset Allocation report is based on U.S. and U.K. public plan documents sourced from eVestment Market Lens through 2019.
The report is compiled from the asset allocation disclosures provided by 206 U.S. plans managing assets of $4.0 trillion and 67 U.K. plans managing assets of £203 billion. While it covers all asset classes public pension plans invest in, this blog post will highlight the activity from UK pension plans in the private markets.
When it comes to allocation targets for alternative investments, UK plans vary significantly from their counterparts in the US. In 2019, UK plans on average targeted 8.92% of their portfolios to hedge funds, absolute return, and private markets asset classes. US plans targeted 14.21% on average in 2019. When drilling down to private equity specifically, US plan targets nearly doubled those of UK plans, 8.50% to 4.61%.
U.K. Public Plan Asset Allocations
While a difference between allocation targets is perhaps simply the result of differing investment philosophies, UK plans’ actual allocations were consistently farther off target than their North American counterparts. UK plan allocations to alternatives trailed targets by an average of 156 bps. In contrast to their under allocation to alternatives, UK plans were heavily over-allocated to public equites to the tune of 470 bps.
Impact of Q1 2020 public market volatility
This over-allocation to the public markets has left UK pension plans reeling from the sharp declines to capital markets globally caused by the COVID-19 pandemic. As the report puts it:
Our assessment suggests U.K. plans fared worse than U.S. plans in Q1 2020, with a higher allocation to public equities, lower allocation to fixed income, and as the dollar appreciated against most currencies including GBP. We estimate aggregate performance of -19.7% for the quarter, equivalent to a loss of -£40.3 billion across our sample of 67 U.K. plans.
The drops in public equities will likely bring plans more in line with allocation targets for that asset class, but will also have an impact on private equity allocations.
The “denominator effect” could raise allocations to private markets funds on paper, and leave the plans overweight against policy. How each plan will deal with this is very much a case-by-case basis. When portfolios were impacted in 2008 by the global financial crisis, many plans had to sell off private fund holdings on the secondaries market at steep discounts due to stringent target allocations. Some learned from this however, and have introduced more flexible ranges to allow for periods of being overweight to the policy target.
Areas of opportunity
One area where there has been increased activity is direct lending and distressed or special situations funds. The report notes, “private debt demand overall looks strong through Q1 2020… this demand will likely persist through 2020. Assuming markets remain volatile, this demand may shift more toward distressed funds on an opportunistic basis.”