More than two thirds of DC pension schemes – 69 per cent – say they expect to increase allocations to real assets over the next two years, an increase from from 51 per cent who said so a year earlier, according to research from Aviva Investors.
The research also found just 6 per cent of DC funds expect to decreasing their allocations to illiquid asset classes over the same period, compared to 29 per cent the previous year.
The study polled 500 institutional investors, including corporate DB and DC pension plans, public pensions, insurers, and financial institutions worldwide, covering the UK, Europe, Asia Pacific, and North America.
DC funds focused on capital growth, diversification and capital preservation as the key benefits offered by real assets. The 2023 market volatility emphasised the importance of real assets for diversification and uncorrelated returns, as highlighted in the survey results, with 64 per cent of global institutional investors citing diversification as a primary reason for allocating to real assets today.
Whilst 53 per cent of DC pension funds currently only offer access to real assets via allocations within default funds, 45 per cent of those surveyed expect members will be able to self-select their exposure to real assets funds in the future.
Globally, 53 per cent of institutional investors are driven to invest in sustainable real assets due to improved financial performance, while 51 per cent prioritise the ability to demonstrate sustainability impact.
Regionally, performance is the primary focus in North America, whereas European investors prioritise impact evidence, showed the research.
47 per cent of global institutional investors expressed confidence in meeting long-term net-zero commitments in real assets, with higher confidence among European investors.
Despite market repricing, real estate equity remains the most attractive, comprising 27 per cent of average real asset portfolios. Infrastructure debt and equity have grown, while real estate debt and long income have increased since 2022, according to the research.
The survey found 51 per cent of respondents thought real assets’ ability to provide long-term income will become more crucial in the next two years, influenced by expectations of lower interest rates impacting fixed-income portfolio income.
Daniel McHugh, chief investment officer at Aviva Investors, commented: “DC pension funds represent an increasingly large portion of the pension market, yet this important group of investors have not been able to access – or allocate to – real assets as they would like, or to the extent that optimises investment outcomes. The emergence of Long Term Asset Funds has lowered these barriers, giving better access to a more diverse range of investment opportunities and driving demand sharply upwards.”