For InstItutIonal use only - J.P. Morgan · vary across different asset categories—i.e., some...

I n v e s t o r s r e s p o n d

For InstItutIonal use only

About JPMorgan Asset Management

For more than a century, institutional investors have turned

to JPMorgan Asset Management to skillfully manage their

investment assets. This legacy of trusted partnership has

been built on a promise to put client interests ahead of

our own, to generate original insight, and to

translate that insight into results.

Today, our advice, insight and intellectual

capital drive a growing array of innovative

strategies that span U.S., international and

global opportunities in equity, fixed income,

real estate, private equity, hedge funds, infra-

structure and asset allocation.

In the first quarter of 2008, we talked to approximately 200 institutional investors about alternatives. The response was unequivocal. Alternative strategies, including private equity, real estate and absolute return/hedge funds are now established components of many institutional portfolios. At the same time, infrastructure, portable alpha and “green” investing are defining their strategic footprint.

JPMorgan Asset Management’s leadership position in alternative investing has given us a unique perspective in understanding the needs of corporate plans, public funds, endowments, foundations, and other institutions. Our surveys, workshops and conferences enable our clients to gain a better understanding of alternative investing. They also provide a forum for exchanging ideas among peers, learning about new investment strategies and discovering innovative solutions to today’s investment challenges.

We are deeply grateful to all the institutions that took part in our research and made this report possible. We hope this report will provide you with a benchmark view of the state of U.S. institutional investors in their quest for investment success.

Sincerely,

John H. HuntCEO Institutional AmericasJPMorgan Asset Management

FOREWORD We first reported a growing demand for alternative

strategies in our 2005 investment survey. Since

that time, changes in the investing and economic

environments, along with evolving regulations have

spurred further innovation and accelerated the

adoption of alternative investment strategies.

EXECUTIVE OVERVIEW

KEY FINDINGS

PaRT 1: aNalYSIS bY aSSET ClaSS

10 abSOlUTE RETURN/HEDGE FUNDS

14 PRIVaTE EQUITY

17 REal aSSETS: REal ESTaTE

19 REal aSSETS: INFRaSTRUCTURE

22 REal aSSETS: OTHER

23 PORTablE alPHa

25 NET lONG (130/30)

26 GREEN/SUSTaINablE

PaRT 2: aNalYSIS bY INVESTOR SEGMENT

28 CORPORaTE PENSION PlaNS

32 PUblIC PENSION FUNDS

36 ENDOWMENTS & FOUNDaTIONS

CONClUSION

PaRTIal lIST OF PaRTICIPaNTS

TablE OF CONTENTS

NEXT GENERaTION alTERNaTIVE INVESTING 1

EXECUTIVE OVERVIEW

Over the last decade, “alternative” investments have seen steady growth, to the point that many in the industry question whether they are truly “alternative” anymore. Our most recent survey of some of the largest U.S. institutional investors should put to rest any lingering doubt. The survey confirms that these strate-gies—now established components of many institutional portfolios—are no longer “alternative” at all.

In fact, alternatives now play an essential role in institutional portfolio strategies, and we expect across-the-board allocation increases despite recent market turmoil.

Growth in assets, growth in options Our survey results clearly indicate that institutional investors as a whole are embracing all available options within alternatives—both the more traditional and the cutting edge. Strong inflows are expected for the largest and most well-established alternative asset classes (real estate, private equity, absolute return/hedge funds), as well as a range of new, innovative strategies that are already taking hold.

For this survey, we expanded the alternatives universe to include several of these newer strategies and found substantial growth potential in categories such as:

n Infrastructure, which is becoming an important diversification strategy within “real assets,” a cate-gory increasingly used to refer to “tangible” assets (e.g., real estate, commodities, infrastructure, farm-land/timber, etc.) which can help preserve the “real” value of portfolios.

n Green/sustainable investing, which captures a rapidly emerging trend—a non-traditional the-matic investment approach that blends economic/market opportunity with policy considerations and environmental concerns.

n Portable alpha and net long (130/30) strategies, which may not be categorized as “alternatives,” but have a philosophical or functional connection to

alternatives. These strategies seek to help investors add alpha to traditional allocations, either by port-ing alpha from other sources, or making traditional assets work harder and smarter. Alternative strate-gies and investment approaches are often used to generate the additional alpha.

alternatives are helping investors meet their objectivesAs investor sophistication increases—and plans are less constrained in their views of asset class boundaries and the management of alpha and beta—alternatives are playing an ever more important role in enhancing portfolio risk/return characteristics. An expanding opportunity set within alternatives gives investors many more options regarding how and where to incorporate them.

Ultimately, some of the most interesting survey data concerns the question of “why?”

Here we see that within each investor segment—cor-porate plans, public funds, and endowments and foun-dations—alternative asset classes are being custom fit into portfolios with a specific purpose, to help address sector-specific issues and challenges. These new tools have been a critical complement to traditional portfo-lios, and planned increases to alternatives are a testa-ment to their overall effectiveness in helping investors meet their unique objectives.

The future of alternatives will not be without chal-lenges—e.g., how to access top managers and high-quality opportunities. Liquidity, transparency, educa-tion, and resource issues will also grow with the size of these allocations. But our survey suggests that, in the view of investors, such concerns continue to be outweighed by the benefits investors are reaping and continue to expect from alternatives.

We believe the survey tells a powerful and very posi-tive story about alternatives—one that will continue to unfold over the next several years.

2 NEXT GENERaTION alTERNaTIVE INVESTING

Research methodology

This report provides the findings from JPMorgan Asset Management’s 2008 institutional investor survey—Next Generation Alternative Investing.

The study, conducted earlier this year, canvassed senior decision makers at the largest U.S. corporate and pub-lic defined benefit plans, and Endowments and Foun-dations (E&Fs)—191 institutions representing approximately $1.26 trillion in assets (Exhibit 1).

The survey was conducted for JPMorgan Asset Man-agement by Greenwich Associates, primarily via phone interviews, during first quarter, 2008. Corpo-rate and public plan respondents were drawn from Greenwich Associates’ annual survey of plan sponsors and includes those investing or planning to invest in alternatives.

Exhibit 2 provides a breakdown of respondents by assets under management within each investor seg-ment. It highlights the fact that public fund respon-dents are, on average, three to four times larger than corporate plan and E&F respondents. Average alloca-tions in our survey report are not dollar-weighted. Therefore, it is important to keep these size differences in mind when considering potential asset flows, because a similar percent change in allocation could generate much larger asset flows from public funds than from corporate plans or E&Fs.

Exhibit 3 shows the funded status of pension plan respondents. The management of funded status can influence strategic asset allocation policies and the use of alternatives by these investors.

Allocation data was self-reported by survey partici-pants, and all results are based on available responses to specific survey questions. The respondent base may vary across different asset categories—i.e., some respondents did not provide data in every category, or answer every question. Such reporting inconsistencies may lead to discrepancies: in some cases the reported “total alternative allocation” does not exactly match the sum of individual alternative asset class alloca-tions. However, these discrepancies do not affect either the direction or degree of the trends identified in this survey.

* Total and average $AUMs exclude 4 corporate and 2 public funds for which assets were not reported. ”Other” refers to 9 Taft Hartley plans. Due to small sample size, Taft-Hartley responses are only included in “total respondent” results.

Exhibit 1: Survey respondent base*

56 E&Fs($3 bn avg AUM)9 Other

($14.7 bn avg AUM)

191 respondents $1.26 trillion total AUM (as of 12/31/07)

50 Public funds($14 bn avg AUM)

76 Corporate plans($4.2 bn avg AUM)

Exhibit 3: Distribution (%) of pension plan respondents by funded status

Funded status Total (114) Corporate plans (63) Public funds (44) Taft-Hartleys (7)

less than 80% 9% – 25% –80-95% 33 20% 50 43%96 to 100% 28 37 16 29Over 100% 29 43 9 29

as of 12/31/07. Results may not sum to 100% due to rounding.

Exhibit 2: Distribution (%) of respondents by size ($ AUM)

Size ($ billions) Total (185) Corporate plans * ( 72) Public funds (48) E&Fs (56) Taft-Hartleys (9)

avg aUM $4.2 bn avg aUM $14 bn avg aUM $3 bn avg aUM $14.7 bnUnder $1 6% 4% 2% 11% 22%$1–1.9 34 29 21 54 22$2–4.9 32 46 25 20 33$5–9.99 11 13 15 5 11$10–14.9 9 6 13 11 –$15–19.9 2 – 6 – –$20–29.9 2 1 4 – –

$30+ 5 1 15 – 11

as of 12/31/07. Results may not sum to 100% due to rounding. $ aUM for corporate and public respondents is for defined benefit plans.

EXECUTIVE OVERVIEW


KEY FINDINGS

I. alternative or essential? alternatives have become an essential part of portfolio strategies for institutional investors employing them. Growth expectations for alternatives remain strong despite current market disruptions, dislocations, and sub prime contagion. Institutional assets are shifting from the traditional to the alternative.

n Among total survey respondents, average alloca-tions to alternatives exceed 18% and are expected to exceed 22% by 2010—an increase of over 20% (Exhibit 4). Endowments and Foundations (E&Fs) continue to lead the way with a projected 36% of portfolio assets committed to alternatives by 2010.

n Growth is being driven by a pervasive need to enhance and diversify returns, and alternative allo-cations are being funded by a shift in allocations away from traditional assets. Across all investor segments, broad issues of “diversification” and “increased returns” were cited as the primary drivers of changes to alternative allocations.

n While there are distinct differences among investor segments, an overall alternatives allocation of 20% to 30% is seen as about right. Only 37% of respon-dents said this range was too high, and 20% said it was too low (Exhibit 5). On average, E&F portfo-lios already exceed these allocation levels.

n Surprisingly, the rate of growth of alternatives overall—and even within asset classes—seems unaffected by recent market turmoil. In some cases, allocation increases are the result of investors seek-ing opportunity in current market dislocations.

Average allocations across all respondents (%) Total EquityFixed IncomeAlternatives

55 5163 57 52

61 57 56 51 47

2626

2630

3328

27 2719

18

18 2211 13 15

11 16 1829

36

0

20

40

60

80

100

2007

Total Corporate Public E&F

2010 2004 2007 2010 2004 2007 2010 2007 2010

Exhibit 4: Allocations continue to shift from the traditional to the alternative

Data for 2007 and 2010 is from this current 2008 survey, while data for 2004 is from the JPMorgan asset Management New Sources of Return Survey, 2005. In both surveys, corporate and public respondents were drawn from the largest 350 U.S. pension plans, but the composition of the respondent base varies. base for 2005 survey: corporate (64), public (50); base for 2008 survey (2007, 2010): total (146, 133), corporate (62, 56), public (39,34), E&F (43,40).

Note: Totals may not sum to 100% due to rounding. allocations presented here are averages of allocations provided at the total alternatives, fixed income and equity levels. Similarly, allocations to alternative asset categories (e.g., those presented in Exhibit 6) are averages of allocations provided at the specific strategy level. The number of available responses may differ across component strategies. Therefore, component data will not necessarily sum to these total alternative values.

Exhibit 5: Overall, respondents feel an allocation of 20% to 30% to alternatives is about right

“Would you say a 20% to 30% asset allocation to alternatives is...” asked of all respondents. Respondent base is in parenthesis.

% total respondents (178)

Too low?20%

Just right?43%

Too high?37%


II. Sizing up strategiesGrowth in average allocations is expected across all major alternative asset classes, with absolute return/hedge funds and private equity growing the fastest (Exhibit 6).

n Absolute return/hedge funds: These strategies have the highest average allocation of any alterna-tive asset class—for current investors in this asset class (Exhibit 7), as well as across all survey respon-dents, including investors and non-investors (Exhibit 8). We estimate that these strategies will account for 40% of net inflows into alternatives through 2010.

n Private equity: Growth for this more “traditional” alternative will also be strong, led by 62% of current investors planning to increase allocations, the high-est across all alternative asset classes (Exhibit 9). Given an already high participation rate (75%), the percentage of new investors adding this asset class is expected to be relatively low (Exhibit 10).

n Real assets/real estate: This mainstream portfolio component will experience more modest growth—receiving a boost from new and existing E&F inves-tors—with an increasing emphasis on diversifica-tion into non-U.S. assets.

III. Diversification within alternativesInvestors are emphasizing diversification within their alternative portfolios—among various estab-lished and new types of alternative strategies, as well as across geographic regions.

n As investors seek to diversify holdings within “real assets,” two asset classes in this category are expected to see substantial growth:

– Real assets/infrastructure is expected to see its relatively small investor base more than double over the next three years—led by new corporate and public plan investors (Exhibit 10).

KEY FINDINGS

Average total portfolio allocations (%)—investors and non-investors

Absolute return/hedge funds

Private equity

Infrastructure/other real assets

Real estate

5.1 5.84.5 5.0

7.2 7.33.9

5.4

2.4

1.1 1.3

0.6 1.2

3.5

4.94.9

6.5

4.35.2

4.45.1 6.4

9.17.4

9.3

4.5

5.8 3.9

5.8

14.1

16.3

1.7

0

5

10

15

20

25

30

35

40

2007 2010 2007 2010 2007 2010 2007Total

(146) (133)Corporate(62) (56)

Public(39) (34)

E&F(43) (40)

2010

Exhibit 6: Allocations are expected to increase across major alternative asset classes

Note: allocations presented here are averages of available responses. The number of available responses may differ across component strategies. allocations in Exhibit 4 are averaged across all available responses at the total alternatives level. Therefore, total alternative allocations in Exhibit 4 do not represent the sum of component allocations presented here.

2007 2010


(89) (77)

Privateequity

(94) (81)

Realestate

(101) (88)

6.66.6

11.5

8.67.0

13.4

Average allocation (%)

Exhibit 7: Average allocations across all current investors in…

based on respondents currently investing in the specified asset class. Respondent base is in parenthesis.

5.14.9

7.46.5

5.8

9.3

Absolute return/hedge funds(129) (116)

Private equity(126) (112)

Real estate(130) (116)

Average allocation (%) 2007 2010

Exhibit 8: Average allocations across all respondents for…

average allocations are calculated across all respondents—including investors and non-investors in the specified asset class. Respondent base is in parenthesis.


– “Other real assets” (e.g., oil & gas, commodi-ties, farmland/timber, maritime, etc.) will see the greatest growth from allocation increases by cur-rent investors—largely E&Fs—with moderate growth among new investors (Exhibits 9, 10).

n Portable alpha is currently used by 31% of respon-dents; an additional 15% expect to add these inno-vative strategies by 2010 (Exhibit 11).

Getting the big picture:

Exhibit 6, in combination with Exhibits 7 through 11, capture our broad findings regard-ing the growth of individual alternative asset classes across the total survey respondent base. Similar exhibits throughout this report provide additional detail at the investor seg-ment level.

n Exhibit 6 shows average alternative alloca-tions—current 2007 and anticipated 2010—across all survey respondents, including both current investors and non-investors (those planning to invest and those not considering investing) in the specified asset classes. This view captures the impact on growth of both new investors adopting these strategies and existing investors planning to increase or decrease current allocations.

n Exhibit 7 shows current 2007 and expected 2010 average allocations across all respon-dents currently investing in the specified asset class.

n Exhibit 8 shows current 2007 and expected 2010 average allocations for all respon-dents—including both investors and non-investors.

n Exhibit 9 shows the percentage of respon-dents currently investing in and planning to increase (decrease) allocations to the speci-fied asset class.

n Exhibit 10 shows current investor participa-tion rates, as well as the percentage planning to invest.

n Exhibit 11 shows current investor participa-tion rates, as well as the percentage planning to invest in newer “alternatives.”

KEY FINDINGS


(180)

Privateequity(178)

Realestate(182)

Infrastructure(152)

Otherreal assets

(175)

38

13

7675

59

5 9 1410 7

Currently invest Plan to invest% of respondents

Exhibit 10: Participation rates—percentage of total respondents currently investing or planning to invest in…

Respondent base is in parenthesis.


(103)

Privateequity(125)

Realestate(125)

Infrastructure(17)

Otherreal assets

(58)

5362

4653 53

-100-5-7 -7

Plan to increase Plan to decrease% of respondents

Exhibit 9: Percentage of all current investors planning to increase (decrease) allocations to…


31

24

1215

119

Portablealpha(170)

Net long equity(130/30)

(173)

Green,sustainable

(148)

Currently invest Plan to invest% of respondents

Exhibit 11: Participation rates—percentage of total respondents currently investing or planning to invest in…



n Net long equity strategies (e.g., 130/30) are used by about a quarter of investors, with 9% intending to add them, primarily to enhance returns of tradi-tional equity allocations (Exhibit 11).

n Green/sustainable, with a small current investor base, showed surprising strength, with a significant boost expected from public funds over the next three years.

n Survey results reveal a fast-growing emphasis on geographic diversification. Among all alternative asset classes, this trend is most evident in real estate. However, the appeal of non-U.S. assets is also evident in private equity.

IV. Investor dynamicsalthough all investors share a common need for return enhancement and diversification, the growth dynamics of alternatives play out differently in each investor segment, due to unique issues and concerns—e.g., institutional objectives, regulatory challenges, financial and board constraints, and levels of experience. (In-depth discussion of the dynamics within individual investor segments is provided in subsequent sections of the paper.)

n Corporate plan sponsors appear somewhat more cautious than other investors with regard to alterna-tives. We see this posture driven primarily by regu-latory and accounting reforms, which pose a two-pronged challenge for corporate plan sponsors: controlling the impact of the plan on corporate financials, while still earning returns sufficient to meet benefit obligations.

Among corporate plans, specifically, over the next three years:

– Absolute return/hedge funds, infrastructure, and portable alpha will have the highest rate of new investors.

– Private equity shows the highest percentage of current investors planning to increase their allocations.

– While absolute return/hedge fund allocations may see somewhat slower growth among corpo-rate versus public funds, we expect this asset class

to account for the largest increase in alternative dollar flows for corporate pension portfolios.

n For public funds, the main issue of concern is con-sistently delivering required returns to meet benefit obligations over the long term, leading to a sharp focus on improving risk-adjusted performance of the overall portfolio. As a result, the current pos-ture of public funds toward alternatives is more active than for corporate plans, particularly as they diversify beyond real estate and catch up with cor-porate allocations to absolute return/hedge funds.

– In absolute return/hedge funds, our survey indi-cates that public funds will show strong growth among new and existing investors in this asset class.

– Private equity will also show strong growth, driven by increasing allocations from public funds currently investing in the asset class.

– For real estate—a longtime anchor of public funds’ alternative portfolios—we expect average allocations to remain flat, with a shift toward international and global investments.

– Infrastructure will be a growth area, as public funds work to diversify their sometimes large real estate holdings with other real assets.

– Green/sustainable is also growing rapidly, albeit from a small base, with a participation rate expected to nearly triple by 2010.

– Finally, GASB accounting for Other Post- employment Benefits (OPEB) is in transition, and at the time of our survey, there was a great deal of uncertainty around whether, and to what extent, these benefits would be pre-funded, as well as the role alternatives are likely to play in investing assets set aside for funding.

n For Endowments and Foundations (E&Fs) the challenge is to maintain current payouts while pro-tecting the real value of assets. Due to their unique skill set and experience level, E&F alternative allo-cations are 75% to 100% larger than those for pub-lic and corporate plan sponsors, and they have a dis-tinct approach to alternative investing (at least among the larger investors):

– They generally have a more pronounced opportu-nistic posture.

KEY FINDINGS


KEY FINDINGS

– They are typically comfortable with much higher allocations.

– Some view portfolio components purely in terms of alpha and beta.

For E&Fs, we expect to see the following trends over the next several years:

– Strong growth in private equity, led by a 42% increase in average allocations among E&Fs currently investing in the asset class.

– A slower growth rate in absolute return/hedge fund allocations for those currently investing.

– Real estate will be a dynamic asset class for E&Fs—reflecting their opportunistic bias.

– In “other real assets”, E&Fs are expected to con-tinue to lead the way with the highest participa-tion rates by far, as well as the highest rate of new entrants.

V. Meeting expectationsFor the vast majority of investors surveyed, alternative investments are currently meeting performance expectations, across asset classes.

n Currently, investors show a relatively high rate of satisfaction across all alternative categories, with E&Fs showing a slightly lower satisfaction level overall (Exhibit 12).

VI. Growing painsGrowth continues, despite some common concerns and constraints.

n As the number of participants in alternative mar-kets increases, and we see larger inflows, investors are most concerned about the potential impact on performance. Two of the top three concerns cited by respondents focused on declining returns and over-crowding of the alternatives space (Exhibit 13).

Concerns do vary to a degree across client segments:

– E&Fs show the highest sensitivity to issues of falling performance and overcrowding.

– Public funds are notably more concerned about a strain on their staffing and oversight capabilities.

– Corporate plans are more worried than their counterparts about volatility, particularly with respect to funded status.

n Among the most frequently cited factors preventing investment in additional alternative asset classes are the need to obtain board approval and to gain a greater degree of comfort/knowledge with specific alternative investments.

n While fees are not cited among the top investor concerns, there is clearly emerging pressure on fees. Investors believe that fees are fair as long as

Exhibit 12: Percentage of respondents indicating that performance expectations are being met

“I am going to read you a list of asset classes and would like you to tell me what long-term (10 to 15 years) return benchmarks your plan applies to each asset class, and whether they are currently meeting performance expectations.” Respondent base is in parenthesis.

Total (175)

Corporate plans (68)

Public funds (45)

E&Fs (56)

8587

9388

9290

9192

84

8887

90

88

9794

97

10097

96100

100100100100

Real estate

Commodities

Infrastructure

Absolute returnstrategies

Private equity

Hedge funds(77)(26)(10)(38)

(84)(27)(15)(39)

(75)(23)(10)(38)

(108)(38)(33)(32)

(31)(5)(3)

(23)

(14)(5)(1)(8)

Most commonly mentioned benchmarks Infrastructure: No clear benchmark Commodities: CPI plus 500 bps Real estate: NCREIF Index Absolute return: T-bills plus 400–600 bps Private equity: S&P plus 300–500 bps Hedge funds: T-bills plus 300–600 bps


Exhibit 14: Emerging pressure on fees

“Which one of the following statements best describes your view of fees charged to manage alternative strategies?” Respondent base is in parenthesis.

4

2

30

20

36

2

9

13

40

31

4

4

19

29

34

4

5

21

30

33

Our plan is quite comfortablewith fees charged foralternative strategies

Fees are coming down, butour fund is still hesitant to

implement

Fees should be viewed on a per unit of alpha basis

Fees charged for alternativeinvestments are too high

Fees are fair, as long asreturn expectations are met

Total (175)


Public funds (45)

E&Fs (56)

% of respondents

KEY FINDINGS

performance expectations are met, which should be a red flag to managers that there could be a back-lash on fees, or a greater demand for performance-based fee schedules, should performance start to lag expectations (Exhibit 14).

Within specific investor segments:

– Public funds showed the highest absolute sensitivity to fees.

– E&Fs were by far the strongest advocates for charging fees per unit of alpha.

Exhibit 13: Greatest concerns as alternatives become more popular with respect to managing portfolios in the current market environment

“As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current market environment?” Multiple responses accepted. Respondent base = 176.

% of total respondents citing…

1

1

3

3

5

6

7

8

10

10

11

13

15

23

Global recession

Counterparty relationship

Blow up/melt down

Accounting concerns

3Valuations

Fees

Volatility

Transparency

Staffing/oversight capabilties

Quality managers/tools

Risk

No concerns

Overcrowding of space

13Other

Liquidity

Falling returns/performance


PaRT 1. aNalYSIS bY aSSET ClaSS

PREFaCE

While no one should be surprised that overall use of alternatives is quite high—and still growing—our survey did uncover some unexpected trends within this overall growth story:

n Within our survey base, the largest dollar flows into absolute return/hedge fund strategies over the next several years are expected to come from public funds.

n Real estate should see significant inflows from E&F investors, who also plan large increases to private equity allocations.

n Newer categories of alternatives—e.g., infrastruc-ture and other real assets, green/sustainable, porta-ble alpha and net long equity (130/30)—all show strength and will see significant increase in usage by 2010.

n A substantial shift toward international and global assets is taking shape in real estate and, to a some-what lesser extent, in private equity.

In addition, as alternatives become an essential part of institutional portfolios, there is a steady blurring of lines as to what constitutes an “alternative” and in which asset-allocation buckets different strategies belong. For example, equity 130/30 strategies, while

hedge fund-like in their use of shorting, are most often categorized as traditional “equity.” Infrastructure could fall into private equity or real estate, depending on the underlying asset and type of fund used to access it. Real estate itself is increasingly bucketed under “real assets.” And green/sustainable could be classified as infrastructure (e.g., power projects), long only (e.g., eco-friendly stocks), or even real estate (e.g., green building funds).

As the use of alternatives continues to grow, these strategies will open new possibilities for investors to rethink traditional notions of both asset class and asset allocation. And we believe that alternatives will con-tinue to present greater opportunity to add alpha through new approaches to efficient portfolio design.

The following asset-class discussions provide details of how these growth and diversification trends are playing out within specific segments of the alternatives market:

A. Absolute return/hedge funds

B. Private equity

C. Real assets: Real estate

D. Real assets: Infrastructure

E. Real assets: Other

F. Portable alpha

G. Net long (130/30)

H. Green/sustainable


5345

6054

-7 -7 -8Total(103)

Corporate(29)

Public(20)

E&Fs(50)

Increasing Decreasing

% of respondents


Exhibit 18: Percentage of current absolute return/hedge fund investors planning to increase (decrease) allocations by 2010

9.3

5.8 5.8

16.3

14.1

7.4

4.5 3.9

Total (129)(116)

Corporate (52)(47)

Public (34)(28)

E&Fs(40)(40)

2007 2010


averages reflect investors and non-investors. Respondent base is in parenthesis.

Exhibit 17: Average allocations to absolute return/hedge funds among all respondents

abSOlUTE RETURN/HEDGE FUNDS absolute return/hedge funds are the youngest of what could be called traditional alternative asset classes—i.e., real estate, private equity, absolute return/hedge funds. as such they show the lowest overall participation rate, as corporate and public pension plans steadily ramp up their exposure. but thanks to relatively higher liquidity and the ability to diversify across a range of strategy types, these strate-gies also show the highest average portfolio allocation of any alternatives category—across existing investors in this asset class, as well as across total survey respondents. Clearly, for those that use these strategies, they are an essential portfolio component.

Over the next few years we expect to see dynamic growth in absolute return/hedge funds from a number of sources. It is one of the few asset classes expecting strong growth from both new investors adding these strategies and exist-ing investors increasing their allocations. This dual-engine growth dynamic differs from other types of alternatives, where growth is expected to come predominantly from either existing investors or new investors, but seldom from a more balanced combination of both.

5941 42

98

10

1613

Total(180)

Corporate(75)

Public(50)

E&Fs(53)

% of respondents

Investing Planning to


Exhibit 15: Percentage of respondents investing or planning to invest in absolute return/hedge funds by 2010

13.4

9.6 8.9

18.1

15.6

7.48.5

11.5

Total (89)(77)

Corporate (27)(24)

Public (18)(17)

E&Fs(37)(35)

2007 2010



Exhibit 16: Average allocations among current absolute return/hedge fund investors

aNalYSIS bY aSSET ClaSS: abSOUlUTE RETURN / HEDGE FUNDS


n Growth highlights in absolute return/hedge funds:

– Absolute return/hedge funds are expected to account for over 40% of net new dollars invested in alternatives by survey respondents in the next three years.

– A rapid rate of increase is expected in the per-centage of corporate and public plans using this asset class: +30% and +35%, respectively, by 2010 (Exhibit 15).

– Allocations should increase at a rate of 13% to 20% among current investors (Exhibit 16), and 16% to 49% across total respondents (Exhibit 17), with public funds showing the fastest rate of allocation increase.

– More than half of current investors plan to increase allocations (Exhibit 18)—again, with public funds showing the strongest increases.

n Public funds are expected to be the most dynamic investors and a key driver of asset flows—a surpris-ing result when compared with our 2005 survey results for hedge funds. In the earlier survey, public funds trailed corporate plans in participation (10% versus 30%) as well as in existing investor alloca-tions (4% versus 5% of overall portfolio assets).1

By 2010, we expect the reverse to be true for abso-lute return/hedge funds, with public funds

– the largest percentage planning to invest

– the largest percentage of existing investors increasing allocations (with no decreases)

– the fastest rate of allocation increase across all investor segments

– participation rates exceeding that of corporate plans

n E&Fs still show a healthy appetite for further allocations to absolute return/hedge fund strategies, despite a near 100% participation rate and alloca-tion rates substantially higher than other investor segments. More than half of E&Fs are targeting still higher allocations, with expected allocations among current investors to exceed 18% of total portfolio assets by 2010 (Exhibit 16).

n All investors cite a common need to improve risk-adjusted portfolio performance as a chief driver of allocations to absolute return/hedge funds—des variously as increased diversification, volatility reduction, and/or return enhancement (Exhibit 19).


“What is driving these allocation changes to absolute return/hedge funds?” Multiple responses accepted. Respondent base is in parenthesis.

Exhibit 19: Most frequently cited reasons for increasing allocations to absolute return/hedge funds


Public funds (18)

E&Fs (26)

% of respondents

Availableopportunities

Increase fixed income,liability/regulatory

Decrease fixed Income/equity

Improve risk/return

Increase return

Diversification/decrease volatility

12

0

15

15

15

35

6

0

0

17

39

0

19

5

5

24

4850

cribed

1 JPMorgan Asset Management – New Sources of Return Survey, 2005

showing:


Exhibit 20: Percentage of respondents currently investing or planning to invest in absolute return/hedge funds via...

“Does your plan currently/plan to access absolute return/hedge funds via…” Multiple responses accepted. asked of those currently investing or planning to invest in absolute return/hedge funds. Respondent base is in parenthesis.

Fund-of-funds, single strategy

Single manager, multi-strategy

Single manager, single strategy

Fund-of-funds,multi-strategy

% of respondents investing or planning to invest

2

4

4

2

3

0

3

17

27

17

24

3745

27

3458

2848

14

10

5

10

15Currently investing Planning to


Public funds (29)

E&Fs (52)

n But individual investor segments show different preferences and sensitivities in how they access these strategies:

– Vehicle preferences show clear distinctions among investor segments (Exhibit 20):

• E&Fs use single manager funds most often—a possible reflection of their longer experience and higher degree of confidence with these types of strategies.

• Corporate and public plans, by comparison, use fund-of-funds vehicles when accessing multi-strategies, but use single managers for single strategies. This could be a reflection of a preference for core/satellite approaches. In addition, fund-of-funds can be an efficient way for new investors to establish a diversified portfolio, gain access to top managers and accomplish their due diligence in a less resource-intensive way—important consider-ations for these investor segments, which have low participation rates and a high number of new investors adding this asset class.

– “Top 3 challenges” are also seen differently across investors. Though “transparency” is cited as the top challenge for all investors, E&Fs differ mark-edly from corporate and public pension plans on other issues (Exhibit 21).

• E&Fs showed the least sensitivity to fees and the highest sensitivity to manager access.

• Corporate and public plans showed much higher sensitivity to fees and headline/reputa-tion risk.

• Public funds showed the most concern about board approval.

– Lock-ups longer than one year affect investor decisions to varying degrees across segments (Exhibit 22). Here again, we see the established pattern of E&Fs showing the greatest flexibility. Corporate plans showed the most cautious approach, with public funds in the middle.



“What are the top three challenges you face when considering investments in absolute return or hedge funds?” asked of all respondents. Multiple responses accepted. Respondent base is in parenthesis.

Exhibit 21: Top three challenges to investing in absolute return/hedge funds

25

21

11

7

9

9

37

45

46

24

24

15

2

10

20

11

11

19

30

24

4

Transparency

High feearrangements

Headline risk/reputation risk

Liquidity

Access totop-performing

managers

Resources andexpertise

Board approval

% of respondents citing...


Public funds (41)

E&Fs (54)

Public funds

(Based on 40 respondents)

Yes 68%

No 33%

Corporate plans


Yes 44%

No 56%

E&Fs


Yes 82%

No 18%

Exhibit 22: Would you invest in an absolute return/hedge fund strategy with a lock-up longer than one year?

“Have you invested or would you consider investing in funds requiring a lock-up longer than the typical one year?” asked of all respondents.



PRIVaTE EQUITYPrivate equity, a more “traditional” alternative, shows strong participation within each investor segment. Overall participation in this asset class (across “all respondents”) is on par with real estate, a longtime staple of alternative portfolios.

Private equity also shows a high percentage of current investors (62%) planning to increase their allocations—the highest percentage of any alternative asset class. as a result, private equity can be expected to see strong growth over the next several years, due to substantial inflows from existing investors as they manage the impact of the private equity cycle (commit-ments, investments, distributions) on reaching target allocations.

n Growth highlights in private equity:

– E&F investors currently lead the way with nearly 100% participation in this asset class (Exhibit 23), the largest average allocations, and the greatest expected allocation increase (+42%) by 2010—more than double the rate of increase for corporate or public funds—both for current investors in this asset class, and across all survey respondents (Exhibits 24, 25).

– Public pension plans are not far behind E&Fs, however, with a participation rate of 76% and nearly a third of non-investors adding this asset class by 2010 (Exhibit 23). In addition, public funds have the highest percentage of current investors planning to increase allocation by 2010 (Exhibit 26).

Additionally, while public fund allocations are expected to grow 18% by 2010—less than half

Total(125)

Corporate(44)

Public(32)

E&Fs(46)

61

75

5262

-6-5-5 -4

% of respondents



Exhibit 26: Percentage of current private equity investors planning to increase (decrease) allocations by 2010

Total (126)(112)

Corporate (50)(46)

Public (32)(25)

E&Fs(40)(38)

6.5

5.2 5.1

9.1

4.94.3 4.4

6.4

2007 2010



Exhibit 25: Average allocations to private equity among all respondents

Total(178)

Corporate(71)

Public(46)

E&Fs(54)

7563

7693

5

4

7

4Investing Planning to% of respondents


Exhibit 23: Percentage of respondents investing or planning to invest in private equity by 2010

Total (94)(81)

Corporate (33)(29)

Public (25)(18)

E&Fs(35)(33)

8.67.8

6.6

10.5

6.67.4

5.66.6

2007 2010Average allocation (%)


Exhibit 24: Average allocations among current private equity investors

aNalYSIS bY aSSET ClaSS: PRIVaTE EQUITY


as much as E&Fs—public fund respondents’ portfolios are, on average, more than four times larger. So private equity should see substantial, and perhaps even greater dollar flows from public funds than from E&Fs.

– Corporate plans have higher allocations, on average, than public funds and a comparable rate of allocation increase among current inves-tors (Exhibit 24). But corporate plans also show the lowest participation rate in private equity (Exhibit 23) and the lowest percentage of current investors planning allocation increases (Exhibit 26). We believe this posture is consis-tent with their cautious overall approach to alter-natives over the next several years.

n International allocations are strong and expected to grow—with an average non-U.S. allocation of 17% of private equity portfolios, across all current investors.

– E&Fs show the greatest comfort and diversifica-tion abroad (Exhibit 27), with the highest par-ticipation rate in every category except “interna-tional developed.” They are much more comfort-able with Asia/Pacific markets, and significantly more open to global strategies. This is not sur-prising given E&Fs’ overall expertise with alter-natives and their need for diversification as their alternative portfolios continue on a rapid growth trajectory.

– Corporate and public plans, by comparison, show a preference for Europe and other international developed markets. However, corporate plans appear to be diversifying more quickly into Asia/Pacific and emerging markets.

n Where fund vehicles are used to access private equity, investor choices are similar to those for hedge funds—with corporate and public funds using fund-of-funds vehicles for multi-strategy funds, and single managers for single strategies, E&Fs have a clear preference for single manager funds (Exhibit 28).

“Where, other than the U.S., does your plan currently or plan to invest in the future in private equity?” asked of respondents currently or planning to invest in private equity. Multiple responses accepted. Respondent base is in parenthesis.

Exhibit 27: Percentage of respondents currently investing or planning to invest in private equity in...

25

31

15

19

13

18

5

8

5042

40 211

8

4

8

23

2

43

8

40

6

4

50

17

35

21

Europe

Asia/Pacific

Internationaldeveloped

Global

Emerging markets


Public funds (38)

E&Fs (52)

Currently investing Planning to



Exhibit 28: Percentage currently investing or planning to invest in private equity via…

“Does your plan currently/plan to access private equity funds via…” Respondent base is in parenthesis.

4461155

031

419

811238

03

0

1716

23

27 2526

258

Fund-of-funds,multi-strategy

Single manager,multi-strategy

Fund-of-funds,single strategy

Single manager,single strategy


Public funds (38)

E&Fs (52)



“[What is driving our allocation increase to private equity is] diversification, liquidity premium, enhanced returns ... [We are looking at] venture, small and medium-size buyouts.”— Endowment


REal aSSETS: REal ESTaTEReal estate is the most commonly used alterna-tive asset class, with overall participation rates slightly higher than private equity. and some-what surprisingly, the survey showed no overall pullback from real estate, despite recent market turmoil (this survey was conducted during the first quarter of 2008).

In fact, more than a third of non-investors indi-cated that they would be adding this asset class by 2010, and allocations should see a slight increase—both across current investors and all respondents—driven primarily by inflows from E&Fs. Within this trend, however, there is a sig-nificant shift expected toward non-U.S. assets, across all investor segments, led by corporate plans and E&Fs.

n Growth highlights in real estate:

– E&Fs, which have the lowest overall allocations to real estate (Exhibits 30, 31), are expected to show the greatest rate of increase over the next three years, with a strong international emphasis and a reduction in the U.S. share of real estate portfolio assets.

– Among public funds—the largest group of real estate investors—allocations are expected to remain flat among current investors (Exhibit 30), as well as among all public fund respon-dents (Exhibit 31).

– Corporate plans are anticipating slightly higher overall allocations (Exhibits 30, 31), but still have the lowest participation rate (Exhibit 29) and the lowest percentage of current investors planning allocation increases (Exhibit 32).

Total(182)

Corporate(72)

Public(48)

E&Fs(53)

9

10

13

6376

9079

4Currently invest Plan to invest% of respondents


Exhibit 29: Percentage of respondents investing or planning to invest in real estate by 2010

E&Fs(29) (27)

Public (34) (27)

Corporate (35) (31)

Total (101) (88)

7.0 6.87.5

5.46.6 6.6 6.8 7.4



Exhibit 30: Average allocations among current real estate investors

Total (130) (116)

Corporate (52) (47)

Public (35) (28)

E&Fs(40) (38)

5.85.0

5.4

3.9

7.2

5.14.5

7.3



Exhibit 31: Average allocations to real estate among all respondents

E&Fs(40)

Public(39)

Corporate(38)

Total(125)

-10 -13 -8

60

444632

-10

% of respondents



Exhibit 32: Percentage of current real estate investors increasing/(decreasing) allocations by 2010

aNalYSIS bY aSSET ClaSS: REal ESTaTE


E&F (16)

Public (26)

Corporate (14)

-14.6

5.1

-1.8

2.9

1.012.3

11.110.6

3.0

Global International U.S. domestic

“What percentage of your REITs portfolio is currently invested in or do you plan to invest in (region) by 2010?” asked of respondents currently or planning to invest in direct real estate and/or REITs. Respondent base is in parenthesis.

Exhibit 35: Expected net change in percentage of REITs portfolio allocated to…

-8.3

-11.5

9.0

3.7

1.8

1.9

6.8

-4.43.6

E&F (29)

Public (32)

Corporate (39)

Global International U.S. domestic

“What percentage of your direct real estate portfolio (ex-REITS) is currently invested in or do you plan to invest in (region) by 2010?” asked of respondents currently or planning to invest in direct real estate and/or REITs. Respondent base is in parenthesis.

Exhibit 34: Expected net change in percentage of direct real estate portfolio allocated to…

Exhibit 33: Percentage of respondents currently investing or planning to invest in real estate in…

“Where does your plan currently or plan to invest in real estate?” asked of respondents currently investing or planning to invest in real estate. Multiple responses accepted. Respondent base is in parenthesis.

1020

1210

09

211

213

218

21313

718

422

278

410

810

813

812

12

819

815

877

412

849

64

810

48

28

Emergingmarkets

Asia/Pac

U.K.

Canada

Global


ContinentalEurope

U.S.


Public funds (45)

E&Fs (49)


n E&F investors are expected to make a substantial commitment to real estate over the next several years. We believe that E&F’s large anticipated commitment to real estate reflects their generally more opportunistic posture. Over the next three years, E&Fs will have:

– the highest percentage of new investors, with more than 60% of E&F non-investors adding real estate to their portfolios (Exhibit 29)

– a participation rate nearly equaling public funds by 2010

– the largest allocation increases of any investor segment: +26% among current investors and +38% across all E&F respondents (Exhibit 30,

– the largest percentage of current investors increasing allocations (Exhibit 32)

n A strong global diversification trend is expected.

– Real estate investors currently show a strong bias toward domestic U.S. assets—with E&Fs show-ing less domestic reliance than other investors (Exhibit 33). But survey data suggests that this will change dramatically over the next several years, with a greater percentage of investors investing abroad (Exhibit 33). Additionally, international and global shares of both real estate and REIT portfolios are expected to increase significantly (Exhibits 34, 35).

31)

aNalYSIS bY aSSET ClaSS: REal ESTaTE


REal aSSETS: INFRaSTRUCTUREGrowth in this asset class is expected to be strong, with the overall participation rate among institutional investors doubling by 2010, led by a high rate of new corporate plans and public funds adding this asset class. In addition, more than half of current investors expect to increase

allocations.

n Strong growth is expected from new investors among corporate plans and public funds (Exhibit

– Public funds will lead infrastructure investing; we believe that this strong growth reflects a need to diversify large real estate holdings with other real assets. Corporate plans will see similar growth, driven largely by diversification needs, as well as the long-term, bond-like profiles of core infrastructure investments.

– E&Fs currently have the highest participation rate in infrastructure investing, but results sug-gest growth in this investor base could slow—perhaps reflecting a need for non-investors to gain more knowledge of and comfort with these investments.

n Despite strong growth, infrastructure still poses challenges for investors:

– Investors show wide disparity in how infrastruc-ture is classified in terms of asset allocation (Exhibit 37), i.e., as private equity, real assets, fixed income, or its own discrete asset class. We believe that such wide variations result from the diversity in underlying assets and vehicles used to access infrastructure opportunities.

– In addition, a large percentage of respondents indicated that they lack familiarity and comfort with these strategies, which suggests that asset managers will be required to provide more inves-tor education and support for overall growth in this asset class to continue (Exhibit 38).

Total(152)

Corporate(69)

Public(46)

E&Fs(29)

1310 11

21

1416

173

Investing Planning to% of respondents


Exhibit 36: Percentage of respondents investing or planning to invest in infrastructure by 2010

“To which asset class does/would your plan (be likely to) allocate infrastructure investments?” asked of all respondents. Respondent base is in parenthesis. Multiple responses accepted.

Exhibit 37: How do investors classify infrastructure?

1745

31Other

49

17Fixed income

1323

14Real estate

3814

28Private equity

4232

22Real assets

% of respondents classifying infrastructure as...


Public funds (22)

E&Fs (24)

36):

aNalYSIS bY aSSET ClaSS: INFRaSTRUCTURE


Exhibit 38: What is preventing investment in infrastructure?

“What are the top two reasons preventing your plan from investing in infrastructure strategies?” asked of all respondents not currently or planning to invest in infrastructure. Respondent base is in parenthesis.

25

6

105

4

55

13

56

15

58

15

2

818

44

5423

% of respondents citing…

High correlation toother assets

High volatility

Risk

Less potential forhigher return

Lack of liquidity

Plan/board policy

Lack of knowledge/comfort


Public funds (22)

E&Fs (41)

n North America will see the lion’s share of inflows into infrastructure investment (Exhibit 39)—unlike real estate where we see a clear global diversification trend. However, investors cite “global capabilities” as one of their top criteria when evaluating infra-structure managers, suggesting that this initial domestic bias may reverse (as it has in real estate) as investors’ comfort and expertise increase.

n Investors share a strong opportunistic view of infra-structure (Exhibit 40):

– Not surprisingly, E&Fs show the strongest bias toward opportunistic strategies.

– Corporate plans, by comparison show the lowest preference for opportunistic strategies and the highest preference for “debt-like” strategies, pos-sibly a reflection of their emphasis on managing surplus volatility.

n Closed-end funds are expected to be the most com-monly used vehicle (Exhibit 41):

– An approximately equal percentage of investors plan to add closed-end funds and open-end funds.

– However, closed-end funds will continue to have much higher overall usage—46% for closed-end funds versus 25% for open-end funds. We believe that this bias could be a function of availability, with the asset management industry currently offering largely closed-end investment vehicles.

– Only an additional 5% of respondents plan to add direct infrastructure investments to their portfolios—perhaps not surprising given inves-tors’ stated lack of familiarity and comfort with this asset class.



Exhibit 40: What type of infrastructure investments are of greatest interest?

“Based on your risk/return objectives, which of the following would your plan be likely to invest in, in the future?” asked of all respondents. Respondent base is in parenthesis. Multiple responses accepted.

% of respondents likely to invest in...

Other 2723

Debt-like22

31

0

0

Development(New)

3933

23

Existing39

2035

Opportunistic83

5342


Public funds (15)

E&Fs (23)

“Geographically, where will you be investing in the future in infrastructure” asked of all respondents currently or planning to invest in infrastructure. Respondent base = 23. Multiple responses accepted.

Exhibit 39: Where will investors invest in infrastructure?

9

13

13

13

17

26

65

Other

Int'l Developed

Europe

Asia/Pacific

Emerging Markets

Global

North America

% of respondents planning to invest in...

“Does your plan currently or plan to access infrastructure via...?” asked of all respondents currently or planning to invest in infrastructure. Respondent base = 40. Multiple responses accepted.

Exhibit 41: How are investors currently accessing (planning to access) infrastructure?

Currently accessing Planning to accessListed infrastructure

securities

Direct investments

Open-end funds

Closed-end funds

3

13

10

28

3

5

15

18

% of respondents



REal aSSETS: OTHER(Commodities, oil & gas, timber/ farmland, maritime, and precious metals)

While just over a third of all respondents say they invest in “other real assets” (commodities, oil & gas, timber/farmland, maritime and pre-cious metals), that figure can be a bit mislead-ing, because E&F investors are far more active in this asset class than either corporate plans or public funds. Moderate growth can be expected over the next several years, driven predomi-nantly by existing investors increasing their allocations.

n E&F investors should drive most of the growth in this asset class given that:

– E&Fs have the highest participation rate of any investor segment (Exhibit 42).

– Nearly a third of E&Fs not currently investing plan to add “other real assets” by 2010.

n Diversification appears to be the primary driver of investment in “other real assets” (Exhibit 43)—the other key drivers are split almost equally—increas-ing returns, meeting allocation targets, and hedging inflation.

n Investors do not show a strong preference in terms of investment vehicles (Exhibit 44)—closed-end funds hold a slight edge (38%) with direct invest-ments slightly lower (31%), and open-end funds somewhat below that.

Total(175)

Corporate(71)

Public(46)

E&Fs(51)

38

18

30

757

6

4

8Investing Planning to% of respondents


Exhibit 42: Percentage of respondents investing or planning to invest in “other real assets” by 2010

Inflationhedge

Meet targetallocation

Increase inexpected

returns

Diversification

% of respondents citing...

8

11

11

33

“What is driving these allocation changes to other real asets?” asked of respondents currently investing or planning to invest in other real assets. Respondent base = 36. Multiple responses accepted.

Exhibit 43: Most frequently cited reasons for increasing allocations to “other real assets”

Other

Primaryopen-end

funds

Directinvestments

Primaryclosed-end

funds

% of respondents

110

619

328

632

Currently accessing

Planning to access

Exhibit 44: Percentage currently accessing or planning to access “other real assets” via...

“Does your plan currently/plan to access investments in other real assets via...” asked of respondents currently investing or planning to invest in other real assets. Respondent base = 78.

aNalYSIS bY aSSET ClaSS: OTHER REal aSSETS


E&Fs(47)

Public(44)*

Corporate(69)

Total(170)

31 2836

28

1526

25

15

Using% of respondents Planning to Considering investing*

* among public funds, a very high percentage (about 25%) indicated they were considering investing in portable alpha, but not committed to implementing by 2010. Respondent base is in parenthesis.

Exhibit 45: Percentage of respondents using or planning to use portable alpha by 2010

PORTablE alPHaWe include portable alpha in this survey because these strategies—which seek to add alpha without changing a portfolio’s underlying strategic allocation—are clearly non-traditional and often employ alternative strategies, or an investment approach closely linked to alterna-tives, as the driver of alpha.

n Key highlights for these investment strategies include:

– Currently three in 10 respondents use portable alpha, and that figure is expected to grow by approximately 50% over the next few years (Exhibit 45).

– Corporate plans are expected to see the greatest increase in the percentage of plans employing these strategies, with participation rates nearly doubling—to over 50% by 2010.

– Public funds have the highest participation rate thus far, but that could slow in the near term, as many public funds are “considering” employing these strategies, but have not yet committed to implementing them (Exhibits 45, 46).

n For the largest segment of potential users (corporate plans and E&Fs) implementation of portable alpha strategies is being driven by issues of “potential alpha generation” and “diversification” (Exhibit

“What is driving the changes to your plan’s use of portable alpha strategies?” asked of those planning to increase/decrease their use of portable alpha strategies. Multiple responses accepted. Respondent base is in parenthesis.

Exhibit 46: Most frequently cited reasons for changes to the use of portable alpha strategies


0

0

46

31

14

52

14

38

5

5

24

19

Shifting allocationsfrom bonds

Consideringimplementing

Diversification

Potential alphageneration


Public funds (21)

E&Fs (13)

46).

aNalYSIS bY aSSET ClaSS: PORTablE alPHa


Exhibit 47: What sources of beta are being used in portable alpha strategies?

Source: Greenwich associates annual survey of plan sponsors and endowments with over $1billion in total plan assets. Multiple responses accepted. Respondent base is in parenthesis.

Other

InternationalEquities

DomesticFixed Income

U.S. Equity

5

21

68

84

16

13

29

77

2

14

36

78


Public funds (31)

E&Fs (19)


aNalYSIS bY aSSET ClaSS: PORTablE alPHa

– For the majority of portable alpha investors, U.S. equity is the source of beta (Exhibit 47), though over half of E&Fs using these strategies have ported alpha over domestic fixed income.

– Sources of alpha vary, with fixed income and domestic equity the most frequently employed, followed by hedge funds and international equity.

“What is driving [our use of portable alpha] is low interest rates and more alpha octane on the bonds.”— Corporate plan


NET lONG (e.g., 130/30 strategies) Only a minority of respondents (29%) consider net long (130/30) strategies an “alternative.” The vast majority include these strategies in their “long only” allocations (Exhibit 48). We included them in this study because they are generally less benchmark-constrained, and they rely on approaches philosophically close to “alternatives” (e.g., shorting).

n Approximately one quarter of respondents use these strategies, with reasonably strong growth expected among both corporate plans and public funds (Exhibit 49).

n “Shorting” was cited by respondents as the top reason preventing them from using net long strat-egies—citing “risk of using short strategies” and “track record/experience of the manager in using short strategies.”

n Investors showed approximately equal interest in both fundamental and quantitative strategies, as well as both international and domestic strategies.

29% Alternative investments allocation

% classifying as part of...

71% Long only allocation

“Where do you allocate net long (130/30) strategies?” asked of respondents investing in net long (130/30) strategies. Respondent base = 63.

Exhibit 48: Most respondents classify net long (130/30) strategies as part of long-only assets

Total(173)

Corporate(71)

Public(44)

E&Fs(49)

24 21 2330

910

146

Investing Planning to


Exhibit 49: Percentage of respondents investing or planning to invest in net long (130/30) equity strategies by 2010

“The way we look at [net long (130/30) investing is that it]

frees up the manager to more fully access their capabilities.

Getting more out of the dollar we invest.”— Public fund

aNalYSIS bY aSSET ClaSS: NET lONG (130/30)


GREEN/SUSTaINablE Green/sustainable investing is showing surprising strength, especially among E&F investors and public funds. Key highlights for this non-traditional thematic investment approach include:

n E&Fs have led the way thus far, with 27% of respondents investing and another 6% planning to invest in green strategies, bringing the total to a third of E&F investors (Exhibit 50). New E&F investors, however, are expected to be few in the near term.

n Public funds, by contrast, will be the engine of growth, nearly tripling their participation in green investing by 2010. The increase is likely due, in part, to a concerted effort by some state officials to channel more funding toward this area.

n Corporate plans will double their participation rate for this category but are starting from a small base and are expected to be slower in moving into these strategies (Exhibit 50).

n The most popular approach to green investing is through direct private investment (Exhibit 51), with closed-end funds expected to gain ground, and open-end funds used only rarely.

E&Fs(33)

Public(42)

Corporate(67)

Total(148)

127

10

27

11

7

19

6Investing Planning to


Exhibit 50: Percentage of respondents investing or planning to invest in green/sustainable strategies by 2010

Other

Both openand closed-

end funds

Primaryopen-end

funds

Direct privateinvestments

Primaryclosed-end

funds

12 3

6

63

3

159

1218

Currently accessing

Planning to access

“Does your plan currently/plan to access green/sustainable investments via…” asked of all respondents investing or planning to invest. Respondent base = 34.

Exhibit 51: Percentage of respondents accessing or planning to access green/sustainable strategies via…

“There is a social aspect to this ... you have to weigh the social against the fiduciary responsibility ...” — Public fund

“We are invested in infrastructure that focuses on green/sustainable.” — Endowment

aNalYSIS bY aSSET ClaSS: GREEN/SUSTaINablE


PREFaCE

As with the discussion of asset class growth, we begin by noting that no one should be surprised that insti-tutions are committed to increasing their overall port-folio allocations to alternatives. There are, however, some notable results within the overall growth story that highlight the flexibility of alternatives to meet specific investor needs:

n Corporate plans, though more cautious than other investors, still plan steady increases in alternatives to meet their need for diversified sources of return. This need goes hand-in-hand with their efforts to increase fixed income allocations and durations in order to manage interest rate risk, while decreasing and diversifying equity exposure to manage the vol-atility of returns. Increasing exposure to absolute return/hedge funds, implementing portable alpha strategies and taking advantage of the debt-like nature of long-term infrastructure investments can be expected to play a significant role in their efforts to meet benefit obligations while managing surplus volatility.

n Public funds, challenged to meet their long-term benefit obligations by consistently generating required returns, appear to be moving quite quickly to diversify and expand their alternative portfolios (traditionally heavily weighted toward real estate). This effort will be led by a substantial move into absolute return/hedge funds. Additionally, public funds will be one of the strongest drivers of a wide range of newer alternatives—e.g., infrastructure and “other real assets,” portable alpha, net long (130/30), and green/sustainable investments.

n E&F investors, generally less constrained in their investment policies than other institutions, are still ratcheting up their alternative allocations—to well over a third (36%) of portfolio assets by 2010— despite already having the highest participation rates and highest allocations across a majority of alternative asset classes. Some E&Fs even say there is no limit to how high those allocations could go. These investors are looking for opportunistic invest-ments and new ways to diversify their alternative sources of return—and to maintain performance of their portfolios, even as the alternatives marketplace becomes more crowded.

The different demands, experience levels, resource constraints and organizational challenges facing each investor segment are driving different alternative strategy choices and rates of adoption.

The following discussions provide details about how these growth and diversification trends are playing out within specific client segments.

A. Corporate pension plans

B. Public pension funds

C. Endowments & foundations

PaRT 2. aNalYSIS bY INVESTOR SEGMENT


Duration, in years

9.4

5.7

7.46.7

12.4

6.65.7

5.45.34

6

8

10

12

14

Duration12 months ago

Currentduration

Expected futureduration

All corporate plans (69)

Corporate plans extending (25)

Public funds (27)


Exhibit 54: Corporate plans expect to significantly extend fixed income duration

CORPORaTE PENSION PlaNSCorporate pension plans anticipate steady increases in alternative allocations, particularly in private equity and absolute return/hedge funds—where average allocations across all cor-porate plan respondents are expected to increase by 21% and 29% respectively, by 2010.

However, despite this steady progress, corporate plans appear to be more cautious in expanding their alterna-tive allocations than public funds or E&Fs. On aver-age, corporate plans will have the lowest total alterna-tive allocations, and a majority of corporate plan spon-sors say that a 20% to 30% overall portfolio allocation to alternative assets is too high (Exhibit 52). In addi-tion, corporate plans show the lowest percentage of current investors increasing allocations to major alternative asset classes (absolute return/hedge funds, private equity, real estate).

We believe this cautious posture is driven primarily by regulatory and accounting reforms (e.g., the Pen-sion Protection Act, SFAS 158, an anticipated “Phase II” to the FASB pension accounting project, and FSP SFAS 132(R)-a), which address a range of issues, such as: minimum funding requirements, corporate bal-ance sheet impacts, income statement presentation, and disclosures. These on-going reforms will continue to pose a two-pronged challenge for corporate plan sponsors—controlling the impact of the plan on cor-porate financials, while still earning returns sufficient to meet benefit obligations.

To address their unique situation, corporate plan sponsors are continuing to decrease traditional equity allocations while significantly increasing fixed income allocations (Exhibit 53). Allocations, however, don’t tell the whole story.

Corporate plans expect to implement a large shift in duration within their fixed income portfolios (Exhibit 54). While duration shifts have been accom-plished in the past largely through investing in longer duration cash bonds, nearly half of corporate plans intending to change duration are considering using swaps to synthetically implement the change (Exhibit 55).

The notable issue raised by these shifts is that corpo-rate plan sponsors are deeply engaged in the process of managing their pension plans’ funded status volatility in a rapidly changing regulatory environment. We see their more cautious approach to alternatives as related to these challenges.

% corporate respondents (68)

Too low?7%

Just right?40%

Too high?53%

“Would you say a 20% to 30% asset allocation to alternatives is....” asked of all respondents. Respondent base is in parenthesis.

Exhibit 52: Corporate plans’ view of a 20% to 30% allocation to alternatives

63 57 52

26 30 33

11 13 15

0

20

40

60

80

100%

2004(64)

2007(62)

2010(56)

Alternatives

Fixed Income

Total Equity

% of assets


Exhibit 53: Corporate plans are shifting to fixed income and alternatives

aNalYSIS bY INVESTOR SEGMENT: CORPORaTE PENSION PlaNS



17

21

48

31

45

0

0

11

29

46

Turn-key product to change duration, while enhancing alpha

(e.g., portable alpha)

Futures to synthetically change duration

Swaps to synthetically change duration

Increase total fixedincome allocation

Shift to longer duration bonds,without changing total fixed

income allocation

% of respondents

% who used in the past (28)

% likely to use in the future (29)

Exhibit 55: Corporate plans’ use of futures, swaps and turnkey products to manage duration is likely to increase

“Which one of the following approaches were used to extend the duration of your plan’s fixed income assets?” asked of corporate plans whose duration had increased vs. 12 months ago.“Which of the following approaches would likely be used to extend the duration of your plan’s fixed income assets?” asked of corporate plans considering shortening or extending duration. Respondent base is in parenthesis.

“How we run the asset side is driven by what is going on in the regulatory environment, condition of our balance

sheet and volatility.”— Corporate plan

“We are in the process of extending the duration of our fixed income portfolio. We are trying to get the duration of our fixed income portfolio

more in line with our underlying plan liabilities.” — Corporate plan



Exhibit 57: Average allocations across corporate respondents currently investing in…


6.66.6

8.5 7.86.8

9.6


(27) (24)



2007 2010Average allocations (%)

average allocations are calculated across all corporate respondents—including investors and non-investors in the specified asset class. Respondent base is in parenthesis.

Exhibit 58: Average allocations across all corporate respondents for…


(52) (47)



4.54.34.55.2 5.0

5.8

Average allocations (%) 2007 2010

Growth HighlightsEven as they wait for clarity and finality—on issues such as transparency, reporting, valuation, etc.—our findings suggest that corporate plans recognize the benefits of alternatives in improving overall risk- adjusted return and managing volatility. Alternatives have played, and will continue to play, a key role in this effort. Significant trends in this investor segment include:

n Absolute return/hedge fund strategies are expected to see the highest corporate plan inflows over the next three years—with approximately 60% from current investors and 40% from new inves-tors. Relative to private equity and real estate, these strategies show:

– a higher number of new investors (Exhibit 56)

– higher portfolio allocations among current inves-tors (Exhibit 57) and, by 2010, across all respondents as well (Exhibit 58)

– a large number of current investors increasing their allocations (Exhibit 59)

n Private equity is a more established portion of cor-porate alternative portfolios with a participation rate roughly 50% higher than for absolute return/ hedge funds. Most inflows into private equity will be from these existing investors, with relatively few non-investors adding this asset class (Exhibit 56).

– More than half (52%) of current investors will be increasing private equity allocations (Exhibit

– In dollar terms, over 80% of growth is expected to come from these existing investors.

– A key reason for increasing private equity (in addition to enhancing returns and diversifying the portfolio) is to meet allocation targets (Exhibit 60).

n Real estate growth will be moderate among corpo-rate plans and, surprisingly, will see most inflows


Exhibit 56: Participation rates—percentage of corporate respondents currently investing or planning to invest in…

Currently invest Plan to invest


(75)

Privateequity(71)

Real estate(72)

Infrastructure(69)

Otherreal assets

(71)

Portablealpha(69)


(71)

Green,sustainable

(67)

41

63 63

10

28

74 718 21

1013 10

26

616

% of respondents

59).



Percents represent the difference in the average percentage of the real estate (or REIT) portfolio allocated to the specified region in 2010 minus the average allocation in 2007. For respondents currently or planning to invest in real estate and/or REITs. Respondent base is in parenthesis.

Exhibit 61: Corporate plans expect further geographic diversification of their real estate and REIT portfolios

REITs porfolio (14)

Real estateportfolio (39)

-1.8

-4.4

1.0

3.6

12.3

6.8

Global

International

U.S. domestic

Expected net change in % of real estate (or REIT) portfolio allocated to…

Multiple responses accepted. Respondent base = 17.

Exhibit 62: Corporate plans’ most frequently cited reasons for increasing real estate allocations

% of corporate respondents citing…

Other

Overall increasein alternatives

Inflation hedge

Increase return

Investment policy

Available opportunities(timing/specific)

Diversificationrisk management

6

6

6

18

18

29

35

based on corporate respondents currently investing in the specified asset class. Respondent base is in parenthesis.

Exhibit 59: Percentage of corporate respondents currently investing in and planning to increase (decrease) allocations to…

4552

32

513

7

Plan to increase Plan to decrease

Real estate(38)

Private equity(44)


(29)

% of respondents

Multiple responses accepted. Respondent base = 19.

Exhibit 60: Corporate plans’ most frequently cited reasons for increasing private equity allocations

% of corporate respondents citing…

Other

Improve risk return


Increase alternativeallocation


Diversification(overall and PE)

Increase return

11

5

11

11

16

26

26

coming from new investors—with relatively few current investors increasing allocations, and some planning to decrease.

– Ninety-five percent of the estimated dollar growth in corporate real estate investment will come from new investors—with average alloca-tions across all corporate respondents expected to remain on par with private equity.

– Ten percent of corporate plan respondents (a quarter of non-investors) expect to add real estate to their portfolios (Exhibit 56).

– By comparison, only about 30% of current investors are planning to increase allocations, while 13% plan to decrease (Exhibit 59).

– Growth across existing and new corporate real estate investors will be lead by international/global allocations, with the U.S. domestic share of real estate portfolios expected to decline (Exhibit 61).

– One of the primary reasons cited by those plan-ning to increase allocations to real estate was timing and available opportunities (Exhibit 62).

n Infrastructure—a long-maturity, high-quality asset—presents an opportunity for further return enhancement and diversification with 10% of corpo-rate plans currently investing, a number that is expected to more than double by 2010 (Exhibit 56).

n Portable alpha is the one area where corporate plans lead other client segments in new investor growth. This asset class will see the sharpest increase in participation rates for corporate plans—nearly doubling from 28% to 54% by 2010.

These strategies can help address the need for diver-sified sources of return as allocations to equity decline and bond portfolio allocations increase.


PUblIC PENSION FUNDSFor public funds, the main issue of concern is consistently delivering required returns to meet benefit obligations over the long term. The vast majority of plans (over 75%) are currently under-funded, leading to an even sharper focus on improving risk-adjusted performance of the over-all portfolio (Exhibit 63). as a result, public funds are diversifying sources of return to improve over-all portfolio performance, and alternatives are playing an increasingly important role. a majority of public funds (56%) now say that an overall alternatives allocation of 20% to 30% is either just right or too low (Exhibit 64).

Overall alternative allocations are expected to increase from 15.6% to 18.1% of total portfolio assets between 2007 and 2010, a gain of 16%. This increase in alter-natives is being balanced by a slight decrease in tradi-tional assets, primarily equities (Exhibit 65).

In addition, the “diversification” theme carries through to public funds’ approach to investing in alternatives: they are becoming increasingly active in asset classes where they have not historically had high participation. Absolute return/hedge funds will see a large percentage of new investors adding these strate-gies, as will some of the newer asset classes, such as infrastructure, net long (130/30), and green/sustainable.

The goal of improving risk-adjusted portfolio perfor-mance is evident across multiple questions in the sur-vey. For example, in both absolute return/hedge funds and private equity—which will see the largest dollar inflows from public funds—respondents cite perfor-mance and diversification among the most important factors driving allocation changes to both of these asset classes (Exhibits 66, 67).

Exhibit 63: The majority of public funds are underfunded

Respondent base = 44 public funds.

% of public funds, by funded status—year-end 2007

Under 80%

25%

80–95%

50%

96–100%16%

Over 100%

9%

“Would you say a 20% to 30% asset allocation to alternatives is...” asked of all public respondents. Respondent base is in parenthesis.

Exhibit 64: Public funds’ view of a 20% to 30% allocation to alternatives

Just right?54%

Too high?44%

Too low?2%

% total respondents (48)


Exhibit 65: Public funds are shifting toward alternatives

0

20

40

60

80

100%

2004(50)

2007(39)

2010(34)

61 57 56

28 27 27

11 16 18

Alternatives Fixed Income Total Equity

% of assets

aNalYSIS bY INVESTOR SEGMENT: PUblIC PENSION FUNDS


Respondent base = 18. Multiple responses accepted.

Exhibit 66: Public funds’ most frequently cited reasons for increasing allocations to absolute return/hedge funds

% of public fund respondents citing…

17

6

17

39

50

Other


Improve riskreturn

Increase return

Diversification/decrease volatility

Respondent base = 20. Multiple responses accepted.

Exhibit 67: Public funds’ most frequently cited reasons for increasing allocations to private equity

% of public fund respondents citing…

15

5

5

10

15

30

30

Other

Overall increaseto alternatives


Improve riskreturn

Diversification(overall and PE)


Increase return


“My biggest concern [with respect to managing plan assets

in the current environment] is hitting our target return with

an acceptable level of volatility and risk.”— Public fund

“[We are] moving from fixed income to hedge funds, [seeking]

more equity-like returns with bond volatility.”— Public fund


Growth HighlightsIn most alternative categories, public funds will have caught up to, and even surpassed, the allocations of corporate plans by 2010. Significant trends in this investor segment include:

n Absolute return/hedge funds is the key growth story for public funds, with a majority of inflows (60%) coming from new investors. Participation rates here have increased almost four-fold (to 42%) since our first survey in 20052 and are expected to exceed that of corporate plans by 2010. Over the next three years, relative to other investor segments (see page 10), public funds will show the:

– highest percentage of new investors in absolute return/hedge funds: 16% of public fund respon-dents (Exhibit 68)

– largest allocation increases: +20% among current investors (Exhibit 69), and +49% across all pub-lic fund respondents (Exhibit 70).

– highest percentage of current investors planning to increase allocations: 60% increasing, with none decreasing (Exhibit 71).

n Private equity currently shows a high participa-tion rate of 76% (Exhibit 68), but relatively few new investors over the next few years. We expect most private equity inflows from public funds to come from existing investors: overall portfolio allocations should increase by 18% among current investors (Exhibit 69), and by 16% among all public fund respondents (Exhibit 70).

n Real estate has been the alternative of choice for most public funds, accounting for an estimated 50% of alternative portfolios. Participation in this asset class is approaching 100% (Exhibit 68), with portfolio allocations remaining steady, despite cur-rent market dislocations (Exhibits 69, 70). The dynamic growth in real estate will come from a strong shift toward international/global allocations,


Exhibit 69: Average allocations across public fund respondents currently investing in…


(18) (17)



7.5

5.6

7.46.6

7.48.9


average allocations are calculated across all public fund respondents—including investors and non-investors in the specified asset class. Respondent base is in parenthesis.

Exhibit 70: Average allocations across all public fund respondents for…


(34) (28)



5.87.2

4.43.95.1

7.3



Exhibit 68: Participation rates—percentage of public fund respondents currently investing or planning to invest in…


11

3036

23

7

90

10

76

42

4 4 0Absolute return/

hedge funds(50)

Privateequity(46)

Real estate(48)

Infrastructure(46)

Otherreal assets

(46)

Portablealpha(44)


(44)

Green,sustainable

(42)

16 17 1914

% of respondents

2 JPMorgan Asset Management New Sources of Return Survey, 2005.



especially in public funds’ real estate (ex-REITs) portfolios (Exhibit 72).

n Infrastructure participation among public funds is expected to more than double by 2010 (Exhibit 68), potentially reflecting a comfort with, and a need to diversify large real estate holdings.

n Green/sustainable investing showed unexpected strength among public funds, with a participation rate expected to nearly triple by 2010 (Exhibit 68). We believe that this increase is being driven in part by various state treasurers, state and city controllers and other pension leaders in their efforts to channel more funding toward green investing.3 Several respondents noted the importance of balancing both social and fiduciary responsibilities in pursuing these investments.

n Special issues: GASB accounting for Other Post-employment Benefits (OPEB) is in transition, requiring disclosure of the funded status of OPEB plans, historically funded on a pay-as-you-go basis. At the time of our survey, there was a great deal of uncertainty around whether and to what extent these benefits should be pre-funded, as well as how to invest any assets set aside for funding. It remains to be seen how extensive a role alternatives will play in the investment of these funds (Exhibit 73).

based on public fund respondents currently investing in the specified asset class. Respondent base is in parenthesis.

Exhibit 71: Percentage of public fund respondents currently investing in and planning to increase (decrease) allocations to…


(20)

Private equity(32)

Real estate(39)

60

75

44

6 100



Exhibit 72: Public funds expect further geographic diversification of their real estate and REIT portfolios

REITs Portfolio (26)

Real estateportfolio (32)

5.1

-11.5

2.9

3.7

3.0

1.9

Global

International

U.S. domesticExpected net change in % of real estate (or REIT) portfolio allocated to…

1. “Do you plan to fund your OPEB (Other Post-employment Benefits) liability?”2. “At what level?”3. “And how do/would you construct your OPEB portfolio as compared to your current pension plan?”

Exhibit 73: Will public plan sponsors pre-fund Other Post-employment Benefits (OPEB) liabilities... at what level, and how?

% respondents (50)Level of OPEB Funding:

27% expect to fund the annual required contribution (ARC) only 18% expect to fully fund liabilities

Construction of OPEB Portfolio: 16% expect to construct OPEB portfolios with the same allocation as their current pension portfolio 8% expect to construct an OPEB portfolio that isless aggressive than their current pension portfolio

Unsure30%

No26%

No answer22%

Yes22%Yes22%

3 See for example the Investor Network on Climate Risk (INCR) Action Plan, April 2008.



ENDOWMENTS & FOUNDaTIONSFor E&F investors, the challenge is to maintain current payouts while protecting the real value of assets. With generally less restrictive investment policies and a longer history with alternatives, E&Fs now have an average allocation to alterna-tives of 29%, headed toward 36% in 2010 (Exhibit 74), approximately double that of public funds and corporate plans.

In fact, more than half of E&F respondents say that a 20% to 30% allocation to alternatives is “too low” (Exhibit 75) and approximately a third believe that there is no natural limit on the extent to which alter-natives could displace traditional long-only strategies within the portfolio.

In addition to the highest overall commitment in terms of portfolio allocation, E&Fs in general, show the most dynamic approach to alternatives: i.e., the greatest diversification within alternatives and the most opportunistic view of the market. For example,

they take an opportunistic view of recent market tur-moil, with 68% saying that current credit market dis-locations offer a buying opportunity (Exhibit 76). More than 50% indicate they have taken advantage of shorter-term opportunities (or have the ability to do so) alongside their longer-term strategic investments. Given their strong internal capabilities, E&Fs rely primarily on internal investment staff to implement these opportunistic strategies (Exhibit 77).

Based on their high reliance on alternatives, it is not surprising that E&Fs are concerned that high inflows will create overcrowding and impinge not just on their access to top managers, but also their managers’ access to deal flow and investment opportunity:

n “Falling returns,” “overcrowding,” and “quality managers” were cited as the top three concerns for E&Fs with regard to alternatives (Exhibit 78).

n In addition to transparency, their top concern regarding absolute return/hedge funds is access to top performing managers (Exhibit 79).

% E&F respondents (55)

Too low?51%

Just right?38%

Too high?11%

Exhibit 75: Overall, E&Fs feel an allocation of 20% to 30% to alternatives is too low

“Would you say a 20% to 30% asset allocation to alternatives is...” asked of all respondents. Respondent base is in parenthesis.

Exhibit 74: E&Fs have the highest and fastest growing allocation to alternatives


51 47

1918

29 36

0%

20%

40%

60%

80%

100%

2007(43)

2010(40)

Total Equity

Average allocations across E&F respondents

Fixed Income

Alternatives

Exhibit 76: E&Fs generally view recent changes in the structured products and credit insurance markets as an opportunity

“How do the recent changes in the structured products and credit insurance markets affect your view of alternative investments in your portfolio?” Multiple responses accepted. Respondent base is in parenthesis.

Other

We have less confidence in existing managers and their ability to generate

superior returns

We are cautiously optimistic aboutcurrent and new investment in

alternative strategies

We are not particularly concernedabout the impact of recent market

events on our portfolio

We think current market conditions offer a buying opportunity

% of respondents

144

41

30

68

13

3

47

16

81

17

4

35

52

52

Total E&Fs (55)

Endowments (32)

Foundations (23)

aNalYSIS bY INVESTOR SEGMENT: ENDOWMENTS & FOUNDaTIONS


80

8964

12

7

15

29

21

33

44

36

48

Flexibility to implement shorter-term ideas? Who implements these ideas?

Total E&Fs (41)

Endowments (27)

Foundations (14)

Total E&Fs (53)

Endowments (32)

Foundations (21)

Other

Other good managers who provide the insightful ideas

Existing managers

In-houseinvestment staff

5

913

Yes, we have flexibility to take advantage of shorter-term

opportunities, but have not implemented

48

3222

No, we do not typically invest this way, other than when our

existing managers do so within their current mandate

5

6

6Other

43

5563Yes, we have taken advantage

of shorter-term opportunities

% of E&F respondents

Exhibit 77: E&Fs have taken advantage of shorter-term opportunities alongside their longer-term investment horizon

“Alongside your long-term investment horizon, do you exercise shorter-term investing flexibility to take advantage of current market opportunities?” “If you have implemented shorter-term opportunities, or have the flexibility to do so, who has implemented/is likely to implement these ideas?” Multiple responses accepted. Respondent base is in parenthesis.

46

30

24

19

11

11

4

Transparency

Access to top-performingmanagers

Resources and expertise

Liquidity

High fee arrangements

Headline risk/reputation risk

Board approval

% of E&F respondents citing…

Exhibit 79: Transparency is the primary challenge E&Fs face when investing in absolute return/hedge funds

“What are the top three challenges you face when considering investments in absolute return or hedge fund strategies?” Respondent base = 54. Multiple responses accepted.

% of E&F respondents citing…

22

0

0

2

2

4

4

4

9

9

9

11

15

20

20

28

Other

Counterparty relationship

Accounting concerns

Global recession

Fees

Blow up/melt down

Volatility

Staffing/oversight capabilities

Valuations

No concerns

Risk

Liquidity

Transparency

Quality managers/tools

Overcrowding of space

Falling returns/performance

Exhibit 78: Greatest concerns among E&Fs regarding alternatives and the management of their portfolios

“As alternative investments become more popular, what is your greatest concern with respect to managing your plan assets/portfolio in the current market environment?” Multiple responses accepted. Respondent base = 46.



Growth HighlightsDespite overall high participation rates and high allocations, E&F investors continue to set the pace by increasing their exposure to alternatives nearly across-the-board, in well-established as well as newer alterna-tive categories. Significant trends in the E&F investor segment include:

n Real estate will be a dynamic asset class for E&Fs—a somewhat surprising result, given that this asset class has not been an emphasis for E&Fs historically, and they have dedicated a relatively small share of their alternative portfolios to real estate. On the other hand, this recent attention to real estate is not so surprising when one takes into account their opportunistic approach. Over the next several years, real estate is expected to show:

– a large jump in new investors (13% of E&F respondents) with E&Fs’ participation rate reach-ing 92% by 2010 (Exhibit 80)—nearly equaling the participation rate of public funds

– allocation increases (+26% among current inves-tors; and +38% across all E&F respondents) that are the largest of any investor group (Exhibits 81, 82)

– a majority of existing E&F investors (60%) increasing their allocations (Exhibit 83)—the highest percentage of any investor group

– growth in large part focused on non-U.S. assets, with a declining share of real estate and REIT portfolios allocated to the United States (Exhibit 84)

n Private equity has nearly a 100% participation rate among E&Fs (Exhibit 80). Nevertheless it is projected to be the fastest growing major alterna-tive asset class for E&Fs over the next three years, with a surprisingly large increase in overall portfo-lio allocation: +42% across current private equity investors as well as across all E&F respondents (Exhibits 81, 82).


Exhibit 80: Participation rates—percentage of E&F respondents currently investing or planning to invest in…


(53)

Privateequity(54)

Real estate(53)

Infrastructure(29)

Otherreal assets

(51)

Portablealpha(47)


(49)

Green,sustainable

(33)

2128 30

0 4 3

7579

27

9398

% of respondents

13 815

66



Exhibit 81: Average allocations across E&F respondents currently investing in…


(37) (35)



5.47.4

15.6

10.5

6.8

18.1

2007 2010Average allocations (%)

average allocations are calculated across all E&F respondents—including investors and non-investors in the specified asset class. Respondent base is in parenthesis.

Exhibit 82: Average allocations across all E&F respondents for…


(40) (40)

Average allocations (%)



3.96.4

14.1

9.1

5.4

16.3

2007 2010



In addition, E&Fs are taking a much more aggres-sive posture with respect to geographic diversifica-tion: They are much more likely to invest in Asia/Pacific, emerging markets, and even global strate-gies than other investor segments (Exhibit 85).

n Absolute return/hedge fund strategies are expected to see continued growth, even though the participation rate among E&Fs is 98% (Exhibit 80), and these strategies already represent nearly half of E&F’s alternative portfolio dollar allo-cations. Overall portfolio allocations are expected to increase a healthy 16% by 2010—across both exist-ing investors and all E&F respondents (Exhibits 81, 82).

n Infrastructure participation among E&Fs stands at 21% (Exhibit 80)—approximately double that of corporate and public pension plans. But their inter-est is slowing somewhat, with relatively few new investors planning to add this asset class in the near term.

n Portable alpha should see a steady increase in usage among E&Fs—increasing by approximately 50% by 2010—as these investors seek to further diversify their alpha sources (Exhibit 80).

n Other real assets, valued by these investors for their diversification and inflation-hedging benefits, are another area where E&Fs lead. Their participa-tion in this asset class is expected to rise to more than 80% by 2010, with a relatively large portion of non-investors (approximately 30%) adding this asset class (Exhibit 80). In addition, a large per-centage of existing investors plan to increase allocations.

n Green/sustainable investing is yet another area where E&Fs played the role of “first movers”—with a participation rate (27%) that is more than double public funds and triple corporate plans (Exhibit 80). But it is another area in which E&Fs appear to be taking a breather, with few non-investors look-ing to add this asset class.

based on E&F respondents currently investing in the specified asset class. Respondent base is in parenthesis.

Exhibit 83: Percentage of E&F respondents currently investing in and planning to increase (decrease) allocations to…


(50)

Private equity(46)

Real estate(40)

54

8 4 8

6061



Exhibit 84: E&Fs expect further geographic diversification of their real estate and REIT portfolios

REITs portfolio (16)

Real estate, portfolio (29)

-14.6

-8.3

11.1

9.0

10.6

1.8

Expected net change in % of real estate (or REIT) portfolio allocated to…

Global

International

U.S. domestic


Exhibit 85: Percent currently investing or planning to invest in private equity in...

25

31

15

19

13

18

5

8

5042

40 211

8

4

8

23

2

43

8

40

6

4

50

17

35

21

Europe

Asia/Pacific


Global

Emergingmarkets


Public funds (38)

E&Fs (52)


“[We are] looking for alpha and taking advantage of global opportunities and

growth [in real estate].”— Foundation



CONClUSION

It appears that the anticipated risk-adjusted returns, diversification benefits, and high satisfaction rates with alternatives will continue to support their growth across the board—in all investor segments and alternative asset classes—outweighing investors’ concerns about overcrowding and its potential impact on performance.

Market dislocations have not dissuaded institutions from their program of using alternatives to add sources of uncorrelated return and improve risk- adjusted portfolio performance. In fact, many investors see niches of opportunity and are adjusting their alter-native asset strategies accordingly. What they are not doing in any substantial way is pulling back.

This survey indicates that alternatives, used in the right way, are enabling investors to better tailor investment strategies to address their myriad financial and investment concerns—e.g., controlling volatility, boosting returns, or hedging inflation.

In this regard, “alternative” assets have indeed become an essential part of the portfolio, and the survey data suggest that as investors’ comfort levels rise, so do their overall alternative allocations as well as their diversification within alternative asset classes.

Continuous innovation will be required to meet the needs—and appetites—of institutional investors as they further integrate these strategies. They will require an expanding menu of high-quality, uncorre-lated alpha sources from markets around the world.

No doubt, just as our current survey includes strate-gies (e.g., equity 130/30, infrastructure, green invest-ing) not incorporated in our earlier surveys, we expect our future research on investment trends to cover strategies, structures, investment themes and frame-works now only on the drawing board or perhaps not yet conceived.

For asset managers, this growth will pose a challenge. Investors will demand an increase in the availability and diversification of alternative offerings—challeng-ing managers to maintain quality and performance standards even while significantly increasing capacity. Some are likely to demand packaging and programs that simplify access, portfolio construction, risk man-agement, and due diligence. Others will look to form strategic partnerships with their asset managers to tap into best ideas and develop unique, customized solu-tions for their investment challenges. They are also likely to require more assistance in educating them-selves and their boards, and in effectively incorporat-ing alternatives into their portfolio strategies.

Thus far the industry has proven itself up to the task, with continuous innovation in nearly every aspect of alternative investing. Over the next several years, however, asset managers will distinguish themselves by delivering the highest levels of thought leadership and client service that ultimately serve to meet or exceed clients’ performance expectations for both risk and return.


abb Incorporated

abbott laboratories

air Products and Chemicals, Incorporated

alliant Techsystems Incorporated

american airlines, Incorporated

american Electric Power Company, Incorporated

american Red Cross

ashland, Incorporated

avaya Incorporated

b&W Technical Services Y12, l.l.C.

baltimore County Employees’ Retirement System

battelle Memorial Institute

baylor College of Medicine

baylor Health Care System

baylor University

boise Cascade, l.l.C.

bP North america Incorporated

briggs & Stratton Corporation

Carnegie Mellon University

Casey Family Programs

Charles Stewart Mott Foundation

Citizens Communications Company

City of birmingham Retirement and Relief System

City of Hartford Municipal Employees’ Retirement Fund

City of los angeles Fire and Police Pension System

City of Memphis Retirement System

City of Miami Fire Fighters’ and Police Officers’ Retirement Trust

Colgate-Palmolive Company

Conrad N. Hilton Foundation

Consolidated Edison Company of New York, Incorporated

Corning Incorporated

Cox Enterprises, Incorporated

Cummins Incorporated

Dana Corporation

Daniels Fund

Denver Employees Retirement Plan

Deseret Mutual benefit administrators

Directors Guild of america

District of Columbia Retirement board

DTE Energy Company

Duke Energy Corporation

Duke University

Eastman Chemical Company

Eaton Corporation

El Paso Corporation

Emory University

Energy Future Holdings Corporation (formerly TXU Corporation)

Evanston Northwestern Healthcare

Ewing Marion Kauffman Foundation

Florida State University Foundation, Incorporated

Ford Motor Company

FPl Group, Incorporated

Geisinger Health System

GenCorp

Georgia-Pacific llC

Greater Kansas City Community Foundation

Grinnell College

GuideStone Financial Resources of the Southern baptist Convention

Houston Police Officers’ Pension System

Indiana State Teachers’ Retirement Fund

Inter-american Development bank

PaRTIal lIST OF PaRTICIPaNTS

JPMorgan asset Management wishes to thank all 191 institutions who participated in our survey. The following participating institutions generously agreed to have their names listed in this report.


International brotherhood of Electrical Workers local 26

Jacksonville Police and Fire Pension Fund

John Hancock Financial Services Incorporated

Johnson Controls, Incorporated

lehigh University

lifespan Corporation

lockheed Martin Corporation

los angeles City Employees’ Retirement System

los angeles County Employees Retirement association

louisiana School Employees’ Retirement System

lumina Foundation for Education

Maine State Retirement System

Meadows Foundation, Incorporated

Michelin North america, Incorporated

Michigan Catholic Conference

Minnesota State board of Investment

New Mexico Educational Retirement board

New York-Presbyterian Fund, Incorporated

North Dakota State land Department

Novartis Corporation

NSTaR

Ohio State University

Oklahoma Firefighters Pension and Retirement System

Omaha School Employees’ Retirement System

Pennsylvania Municipal Retirement System

PPG Industries, Incorporated

PPl Corporation

Public Employees Retirement association of New Mexico

Public Employees’ Retirement System of Mississippi

Public School & Education Employee Retirement Systems of Missouri

Public School Teachers’ Pension & Retirement Fund of Chicago

Sacramento County Employees’ Retirement System

San antonio Fire & Police Pension Fund

San Joaquin County Employees’ Retirement association

School Employees Retirement System of Ohio

Sempra Energy

Shelby County Retirement System

Shell Oil Company

Smith College

Smithsonian Institution

South Carolina Retirement Systems

Southern California Edison Company

Southern Ute Indian Tribe

Tallahassee Employees’ Retirement Fund

Texas a&M Foundation

Texas Scottish Rite Hospital for Children

The aerospace Corporation

The Harry and Jeanette Weinberg Foundation, Incorporated

The J. Paul Getty Trust

The McGraw-Hill Companies

The McKnight Foundation

The Nature Conservancy

The Ohio Police & Fire Pension Fund

The Rotary Foundation of Rotary International

The Samuel Roberts Noble Foundation, Incorporated

The UCla Foundation

Tulare County Employees’ Retirement association

UNITE HERE National Retirement Fund

United Farm Workers Juan De la Cruz Pension Plan

United Food & Commercial Workers Union - Pension Fund, atlanta

United Food and Commercial Workers Union local 711

University of alabama

University of arkansas Foundation

University of California

University of Chicago

University of Delaware

University of Florida Foundation, Incorporated

University of Rochester

Virginia Retirement System

Washington Mutual, Incorporated

Wyoming Permanent Funds

IMPORTANT DISCLAIMER

This document is intended solely to report on various investment views held by JPMorgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

This material contains certain projections and assumptions with regard to the opportunities described therein. This material must not be relied upon as advice or interpreted as a recommendation by JPMorgan Asset Management that the opportunities are a suitable investment for any recipient of this information.

Investors may experience results that differ materially from any information shown. The return on the opportunities will depend on the actual investments made and the economic, interest rate and regulatory environment during the relevant period.

Infrastructure investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrowers.

The risk of investing in foreign countries is heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property.

Please note that investments in offshore markets are subject to special currency, political, and economic risks. Exchange rates may cause the value of under-lying overseas investments to go down or up. Investments in certain markets may be more volatile than other markets and the risk to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of the investments made.

JPMorgan Asset Management does not make any express or implied representation or warranty as to the accuracy or completeness of the information contained herein, and expressly disclaims any and all liability that may be based upon or relate to such information, or any errors therein or omissions there from. This material must not be relied upon by you in making a decision as to whether to invest in the opportunities described herein. Prospective investors should conduct their own investigation and analysis (including, without limitation, their consideration and review of the analyses referred to herein) and make an assessment of the opportunity independently and without reliance on this material or JPMorgan Asset Management.

In addition, prospective investors are strongly urged to consult their own legal counsel and financial, accounting, regulatory and tax advisers regarding the implications for them of investing in these opportunities.

JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

© JPMorgan Chase & Co. July 2008 IMWP_ALT SURVEY

JPMorgan Asset Management 245 Park Avenue

New York, NY 10167

jpmorgan.com/insight

Date post:	17-Oct-2019
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

For InstItutIonal use only - J.P. Morgan · vary across different asset categories—i.e., some...

Documents