New Zealand investors are slowly warming to the idea of alternative asset classes, according to Guy Fisher, Aon Hewitt investment consultant.
Fisher said while local wholesale investors are generally underweight alternative assets relative to global peers “there’s a genuine broad interest in the topic now”.
He said as traditional asset class valuations appear stretched and cash rates at all-time lows, NZ investors were keen to explore other options.
“Just selling equities in exchange for bonds or cash presents challenges in terms of the unattractiveness of expected returns of these two simple alternatives,” Fisher told the 100 or so investors who attended the Aon alternative investments roadshow held in Auckland and Wellington last week.
Fisher said NZ investors have trailed the global trend to alternatives – which has seen, for example, offshore pension funds allocate an average 25 per cent to the asset class – for several reasons.
“Performance has been part of it,” he said. “Investors have done well in recent years without looking beyond vanilla asset classes.”
As well, alternative product choice was very limited in New Zealand, Fisher said.
“Three years ago there was really only one alternative product,” he said. “Now there’s four primary ones. And more products would come if there was demand.”
Concerns about fees, complexity and liquidity have also scared investors off alternatives.
“But they’re reasons to be careful about which products you invest in, not an excuse to avoid the entire sector,” Fisher said.
Furthermore, investment consultants “haven’t really rushed” to research the alternatives space.
While a few larger traditional super funds and charities have shown some appetite for alternative assets, he said the burgeoning KiwiSaver market largely avoided the option.
According to Fisher’s analysis of the latest statutory KiwiSaver data, only 1.7 per cent of scheme assets were invested in alternatives (officially described as ‘unknown/other’), which was above the reported target allocation of 1.2 per cent but still represented a paltry $446 million.
The analysis identified only five schemes invested in the ‘other’ category: AMP, Aon, Mercer, Westpac and Kiwi Wealth. Fisher said a large portion of that was commodities or infrastructure products rather than true absolute return strategies.
“ANZ and ASB, which together account for more than 50 per cent of KiwiSaver members, don’t have any alternatives exposure,” he said.
According to Fisher’s research, of the roughly $26 billion in KiwiSaver as at March 31 this year, a whopping $4.7 billion was in cash – representing a 2.7 per cent overweight position relative to reported scheme targets.
With worries about equity and bond markets “there’s nowhere else for [KiwiSaver funds] to be”, he said.
Overall, NZ investors can see the dilemma posed by fully-valued equities and a fixed income market unlikely to offer the same portfolio protection as in the past.
“But they don’t know what to do about it,” Fisher said.