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Shift to alternatives increases investor costs
30 January 2014
Moody's says that asset allocation move expected will benefit asset managers with higher fee structures
The structural shift among investors toward greater asset allocation to alternative investments will benefit asset managers with expertise in alternative asset classes, says Moody's Investors Service in a new report.
Assets under management (AuM) will see incremental growth and management fees will be higher for alternative asset classes (real estate, private equity, direct lending and absolute-return driven strategies) compared with traditional asset classes, such as stocks and bonds.
Moody's says that increased allocations to alternatives will likely continue as investors, notably pension funds, search for higher returns. This structural shift by pension funds toward greater alternative investments is a credit positive development for skilled alternative asset managers that can mitigate the typically greater risks associated with alternative investments.
"Pension funds are increasingly moving towards alternative investments, which offer higher portfolio returns and better protection against inflation and price volatility,” said Soo Shin-Kobberstad, a senior analyst at Moody's and the author of the report. "In addition, asset classes such as real estate and infrastructure offer long term asset duration and cash flows that match the profile of pension funds' long term liabilities."
In response to the shift towards alternative AuM, some traditional fund managers have been acquiring alternative asset management expertise. In Moody's view, this gives them a strategic advantage, as building alternative asset management expertise organically takes a long time, given the illiquid nature of (and longer holding periods for) alternative investments.
Moody's also notes that investment management fees are significantly higher for alternative asset classes than traditional asset classes. In addition, alternative investment products offer asset managers performance-based fees while traditional asset classes do not.