Over two thirds (69 per cent) of corporate defined contribution (DC) pension schemes expect to increase allocations to real assets over the next two years, up from 51 per cent in 2022, research from Aviva Investors has revealed.

The survey also found that whilst 53 per cent of DC pension funds currently only offer access to real assets via allocations within default funds, 45 per cent of those surveyed expect members will be able to self-select their exposure to real assets funds in the future.

In contrast, just six per cent of DC funds anticipate decreasing their allocations to illiquid asset classes over the same period, compared to 29 per cent of respondents in the previous year.

Capital growth was seen as the key benefit from real assets, cited by 50 per cent of respondents, followed by diversification (49 per cent) and capital preservation (47 per cent).

The effect of the volatile market environment in 2023 reinforcing the value of real assets in providing diversification and uncorrelated returns was also reflected across the survey, as 64 per cent of global institutional investors cited diversification as a primary reason for allocating to real assets, up from 57 per cent in 2022.

Financial performance was also a key factor, as Aviva Investors found that more than half (53 per cent) of institutional investors saw evidence of improved financial performance as driving them to invest, or increase investment, in sustainable real assets.

This was followed closely by their ability to evidence sustainability-related impact (51 per cent), with nearly a fifth (17 per cent) of respondents highlighting sustainability-related factors as a critical and deciding factor in real assets investment decisions.

North American investors were most likely to prioritise performance over the ability to evidence impact (56 per cent compared to 30 per cent), whilst for European investors the preference was inverted (49 per cent compared to 58 per cent).

In addition to this, more than 15 per cent of North American institutions did not take sustainability-related factors into account, compared with only four per cent of institutions in APAC and two per cent in Europe.

Commenting on the findings, Aviva Investors chief investment officer, Daniel McHugh, stated: “The findings from this year’s study capture one of the most pertinent structural shifts taking place in real assets investment and retirement saving.

"DC pension funds represent an increasingly large portion of the pension market, yet this important group of investors have not been able to access – or allocate to – real assets as they would like, or to the extent that optimises investment outcomes.

“The emergence of long-term asset funds (LTAFs) has lowered these barriers, giving better access to a more diverse range of investment opportunities and this has driven demand sharply upwards.

"Fifty-seven per cent of institutional investors globally have a commitment to reaching net zero, however less than half have confidence in the actions needed to meet these commitments within real assets.

"There is a huge opportunity for asset managers to guide clients and demonstrate how transformational their real assets investments can be in achieving those objectives whilst also delivering positive outcomes for savers.”

Looking at broad allocations to real assets, one-third of institutional investors with an allocation to real assets now hold 10-20 per cent of their total portfolios in these investments.

Despite a significant repricing in the market over the last 12 months, real estate equity remains the most attractive proposition for investors, according to the survey, accounting for 27 per cent of real asset portfolios on average.

However, infrastructure debt (11 per cent) and infrastructure equity (14 per cent) now account for a larger share of real asset portfolios compared to previous years, whilst real estate debt (11 per cent) and real estate long income (12 per cent) have also risen since 2022.

More than half (51 per cent) see real assets’ ability to deliver long-term income as becoming increasingly important over the next two years, with expectations of lower interest rates and therefore lower levels of income from fixed-income portfolios being a likely reason for such a view.

McHugh added: “64 per cent of respondents see diversification as a primary reason for allocating to real assets, whilst 60 per cent see it as a driver when looking ahead over the next two years.

"However, we think the track record of real assets in delivering long-term, inflation-linked income is also incredibly pertinent against the backdrop of today’s market environment and “a dash for cash” being a prevailing theme of the year.

“With 64 per cent of institutional investors globally also planning to increase their allocation to real assets over the next two years, there seems to be growing consensus that opportunities exist to acquire assets at attractive valuations, particularly for those with capital to spare and who have a long-term mindset.”

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