U.K. pensions funds are getting involved 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. He said he looks for tried-and-tested investment avenues that are “slightly outside of where you’ve seen pension funds usually invest.”
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.
One U.K. pension-fund client placed a sliver of its assets in the 100-year Argentine bond sold in 2017, according to Con Keating, head of research at Brighton Rock Group, an insurance provider for pensions. The bond currently offers a 27.712% yield, according to FactSet. Recently those bonds fell by nearly 50% because of political uncertainty.
“This stuff really doesn’t belong in a pension fund,’’ said Mr. Keating. Because of the search for better returns, “you see all sorts of deals being done for all sorts of credit that wouldn’t ordinarily be touched,” he said.
The need to boost returns prompted Nest, a £8.5 billion ($10.9 billion) workplace-pension fund manager backed by the U.K. government, to make its first foray into private markets.
“It’s going to just become harder to eke out any returns from public markets,” said Stephen O’Neill, Nest’s head of private markets. With the new investments, “the main motivation is to try to pick up a private-credit premium—or liquidity premium—over the comparable bonds in the public market,” he said.
APG, which has €440 billion ($486.9 billion) under management, has less than 40% of its portfolio in fixed income, said Thijs Knaap, a senior strategist at the asset manager. Another 34% is in equities, 10% in real estate and 17% in alternative investment classes such as hedge funds and infrastructure. The firm, like many other pension funds, insurers and large investors, sees bonds as a crucial part of its portfolio because of their liquidity.
“You have to work harder for your money,” said Mr. Knaap. “This means we’re taking on risk rather than the old situation of putting everything in bonds.”