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Trends in US, UK public pension allocations could be upended due to COVID-19 pandemic

Monday, April 20, 2020
Opalesque Industry Update - United States and United Kingdom public pensions' over- and under-allocations to various asset classes could mean billions of dollars flowing into or out of asset classes in the near future, according to data from eVestment's new US & UK Public Plan Allocation Report. However, the dramatic change in valuations in public equity and fixed-income asset classes in Q1 2020 as a result of the COVID-19 pandemic could upend trends in allocations to private markets and other alternatives, which have risen in favor among public pensions in the past years.

At the end of 2019, US and UK public pensions tracked by eVestment were most heavily allocated to Public Equities (45.12% for US plans, 55.43% for UK plans), with plans in both countries over-allocated to this asset class. This meant that some -$5.30 billion in US public pension money and -£9.43 billion in UK public pension money was set to move out of Public Equities investments. Fixed Income investments had the next highest allocations among the US and UK public pensions eVestment tracks, at 24.53% for US public pensions and 18.98% for UK public plans, although only US plans were over-allocated to this asset class. (page 4)

Based on public markets performance through Q1 2020 and asset class correlations seen throughout the financial crisis, we estimate U.S. public plans experienced a drawdown of -15.6% in Q1 2020, or a loss of -$619.2 billion across our sample of defined benefit funds. UK plans fared worse with an aggregate return of -20.0% during the quarter, in local terms.

In the midst of the current stressed environment, eVestment calculates Fixed Income allocations to be held significantly overweight through Q1 2020; +4.5% versus target allocations for U.S. plans and +1.6% for UK plans. While valuations continue to fluctuate, the asset class is most likely to see redemptions to fund rebalancing and opportunistic activities.

At the end of 2019, US public pension plans tracked by eVestment were already slightly over-allocated to Private Equity, with this asset class seeing a potential outflow of -$1.26 billion. While not an enormous number, that may go up if current market conditions continue. While this doesn't impact Private Equity commitments already made, Private Equity managers may find themselves facing stronger headwinds in new fundraising from US public pensions this year as a result of the current market turmoil. UK public pensions looked to allocate an additional +£1.51 billion into Private Equity at the end of 2020, and that number may now also be at risk.

Hedge funds were likely to see outflows of some -$3.03 billion based on allocation decisions from the US public pension plans eVestment tracks, while UK public pensions in the eVestment sample looked to be upping their allocations to hedge funds slightly by +£260 million at the end of 2019. But again, as investors search for returns, acceptable risk and stability in this uncertain market, those numbers could change this year.

Real Assets, including Real Estate, Infrastructure and Natural Resources, looked to be a big beneficiary of US public plan allocations decisions at the end of 2019, with under allocations to these investments promising to deliver +$59.71 billion in new money, according to eVestment data. UK public pensions appeared ready to invest an additional +£5.50 billion to this asset class at the end of 2019.

The asset allocation data in this report is sourced from eVestment Market Lens, a curated library of more than 65,000 documents from 8,000+ public and corporate plans in the U.S., U.K. and Canada. Our data science team reviews every document added to the collection to detect intelligence such as differences in current versus future allocations across asset classes. This intelligence helps managers forecast future demand for their strategies and identify opportunities to manufacture new products. This report only looks at US and UK public pension allocation plans.

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