Near-zero yields are making it difficult for pensions and endowments to hit the targets they need to meet their future obligations. It’s pushing disciples of the classic investing strategy of 60% stocks/40% bonds to get more creative.
As an example, the $400bn California Public Employees’ Retirement System (CalPERS), which provides benefits for 2 million current and future retirees, must earn an annual return of at least 7% to meet those obligations. That’s not an easy task when the safe investments that pension funds usually rely on are paying sub 1%.
Creative CIOs are shifting into assets once considered on the fringes of conventional investing, such as single-family rentals, digital assets, supply-chain finance, entertainment royalties, and catastrophe bonds. Institutional investors are now allocating an average 26% of their assets to alternative strategies (up from 11% in 2006).
Allocators will continue to seek higher returns via more esoteric asset-backed structures
While Bowie bonds may have pioneered asset-backed royalties for the musician’s hits in 1997 (“Farewell Major Tom”, FinTech Collective Newsletter, January 2016), some of these alternative assets are now investable (at scale) for the first time through modern data and tech-driven asset managers.
We have no doubt that allocators will continue to seek higher returns via more esoteric asset-backed structures. For asset managers not willing to get creative (and perhaps skip dressing-up for Halloween), they will have to call 1-800-NO-YIELD and trade ‘risk-free’ government debt.
This article was previously published by the FinTech Collective and is republished with permission.
