For decades Dutch pension cash flowed to the place most likely to deliver steady and safe returns: government bonds.
No longer. Now the investor behind the Netherlands' biggest pension fund is channeling retirement savings to a Belgian airport, a bicycle parking lot in Utrecht and toll roads in the U.S. and Spain.
"Because of low interest rates, we have to cast our nets far and wide to search for returns," said Thijs Knaap, senior investment strategist at APG Asset Management. "We increasingly invest more away from home. It's where the growth is."
In a world of stuttering expansion -- where yields on $14 trillion of bonds have turned negative -- income is draining away on government debt that matches their long-term liabilities. So they're getting creative to meet ever more-elusive return targets.
Knaap is at the vanguard of a move by the most conservative investors into areas far outside of their safety zone. They're fueling a boom in alternative assets such as private equity, property and infrastructure that PwC estimates will jump to $21 trillion in 2025 from $10 trillion in 2016.
"You've had a mad rush into these private assets," said Elliot Hentov, head of policy research at State Street Global Advisors. "It's a low-yield environment, everyone is piling in."
Even the Church of England is getting in on the act. Its pension board is scaling back stocks in favor of private debt including loans to small, and medium-sized companies. In Japan, the Government Pension Investment Fund's coping strategy for negative yields is to leave: the world's biggest pension fund is considering currency-hedged foreign bonds as part of its domestic debt portfolio.
Central banks around the world delivered more than 700 cuts over the past decade and spent trillions buying bonds. That helped to dodge a depression following the 2008 financial crisis, but growth has eased after a brief rebound, and most major economies undershoot policy makers' inflation targets. The U.S.-China trade war and a slew of geopolitical risks are adding headwinds to growth, deepening the lower-for-longer trend for interest rates.
"Growth is sub-par, and declining," said Jean-Jacques Barberis, head of institutional client coverage at Amundi. "We're in a cycle that never seems to end, as monetary policy is being pushed and pushed to limits. Interest rates are going to stay low for a long time."
Gains from bonds will be generally close to zero in the coming years, according to Amundi. It expects the Barclays Euro Aggregate index to lose 0.1% over the next three years, before returning 0.2% over the next five and 0.3% over the successive decade. BlackRock reckons that a typical 60/40 strategy in which 60% of assets are allocated to equities and 40% to bonds will see average returns fall to 3.5% over the next 10 years from 8.5% in the past decade.
Contrast that with alternative assets. So far they've delivered returns above APG's long-term target of 7% to 10%. The firm garnered 18.6% on private-equity holdings since it started investing in the asset class in 2010. Infrastructure generated a 12.7% internal rate of return since 2011.
A BlackRock survey of clients overseeing $7 trillion of assets published in January found just over half planning to increase their allocation to alternative assets this year.
"One of the biggest benefits of alternative assets is its uncorrelated return to the market," said Anne Valentine Andrews at BlackRock Alternative Investors. "Illiquid assets such as infrastructure investment do not tend to experience the volatility of equities, which is valuable for many investors looking to diversify their portfolios."
But the rapid dash to alternative assets by the stewards of retirement cash comes with risks, and it's caught the attention of regulators. They worry that in a downturn funds would struggle to pull cash out of illiquid assets. While pension funds typically hold debt until maturity it doesn't mean they can't be hurt by mark-to-market losses.
American International Group, which had been the world's largest insurer, was bailed out in 2009. Its losses on debt backed by defaulting subprime mortgages forced it to post collateral to banks and seek an $85 billion government rescue.
"It's all about timing the cycle," said Hentov at State Street, who's presenting his research on private-debt investments at the IMF's annual meetings this month. "You don't want to be the big pensions fund invested in illiquid assets without a spreadable exit window."
At PGIM Fixed Income, which oversees $809 billion, senior portfolio manager Michael Collins said one of his biggest overweight positions is in structured debt such as collateralized loan obligations -- securities pooling high-yield loans made to targets of leveraged buyouts. The Total Return Bond Fund he helps manage has put 20% of its holdings into securitized debt and outperformed 95% of peers over the past year, according to Bloomberg data.
But Collins is sticking with the top-rated pieces of CLOs which are more liquid and last to absorb losses from defaulting loans.
Knaap at APG says buying illiquid assets needs a big balance sheet -- and a lot of homework. That might involving going to India to check out the leaky roof of an apartment building, for example, a "totally different" kind of due diligence than what you'd undertake to buy government bonds.
"You just can't buy a portfolio of houses from one day to another, in contrast to bonds," Knaap said. "It's really labor-intensive."