Alternatives managers’ assets rose in 2010

Higher returns and renewed investor interest pushed most money managers’ alternative assets under management onto higher ground last year, according to sister publication Pensions & Investments’ annual survey of the largest money managers.

Managers of all but a few subclasses of alternative investments witnessed increases in U.S. institutional tax-exempt assets under management as of Dec. 31. Rises were more modest than those of the previous year, with no subclasses showing the triple-digit gains of the 2009 survey.

Putting the pedal to the metal were commodities, up 91% as of Dec. 31. Also showing accelerating assets were managers of infrastructure investments, 27%; real estate investment trusts, 22%; convertible securities, 27%; and high-yield securities, 10%.

UPS AND DOWNS

Managers that had been down in 2009 but were able to drive out of the ditch included those in energy, up 27%; buyout funds, up 15%; and equity real estate and mezzanine debt, each up about 2%.

Among alternatives left stalled on the freeway were collateralized debt obligations — down 31%, on top of the 28% drop in the 2009 survey; private equity, down 6%; timber, with a 4% drop; and whole-loan mortgages, off 3%.

In commodities, returns played a role in the big asset increase, said Jay Kloepfer, executive vice president and director of capital markets research at consultant Callan Associates Inc. The Dow Jones-UBS Commodity Index Total Return had a return of 16.83% in 2010.

Commodities are highly volatile. “They can go up 60% and down 60%. You have to be prepared to ride it out,” Mr. Kloepfer said. They are highly liquid, unlike other alternative asset classes, making them more appealing.

The top commodities manager on this year’s list is Geode Capital Management LLC, whose assets rocketed 236% to $10.6 billion, an increase attributed to the addition of a large new account as well as strong inflows. Gresham Investment Management LLC was second, with assets up 58% to $5.8 billion. Pacific Investment Management Co. LLC was in third place, with commodities assets up 62% to $3.9 billion.

Asset increases in buyout and venture capital sectors were mainly the result of manager portfolio companies’ increasing in value in 2010, said Gary Robertson, senior vice president of Callan. “We’re in a recovery,” he said. “The returns bottomed out in the first quarter of 2009. After that, there has been seven quarters when the market has been marching up.”

In 2009, assets of buyout managers fell 36%.

The one-year return for venture capital was 13.5% in 2010, according to National Venture Capital Association and Cambridge Associates LLC. The private-equity return for the year ended Dec. 31 was 19.86%, according to Cambridge Associates.

Now that private-equity managers are subject to fair-value reporting, returns move in the same direction as the public markets. The difference is that private equity moves only half as far, either up or down, as the stock market, Mr. Robertson said. This is due to the way private-equity managers value their portfolios, he added.

FUNDRAISING LAGS

At the same time, fundraising across all private-equity sectors was miserable.

“Private equity had the lowest fundraising year in a long time,” Mr. Robertson said, referring to data from Dow Jones LP Source, which showed that fundraising in 2010 declined 16% to $86.3 billion.

“Last year was a chicken-and-egg syndrome: Good, tenured general partners didn’t want to come to market because they didn’t think limited partners were ready to invest. Limited partners couldn’t find a large volume of experienced GPs to commit to,” Mr. Robertson said.

What’s more, private-equity managers felt that they had to distribute profits back to investors before they could ask investors for more capital, he said.

The top private-equity manager for the year was J.P. Morgan Asset Management, with $10.4 billion in private equity, up 34% from 2009. Following were Oaktree Capital Management LP, up 21% with $5.87 billion, and ING Groep NV, up 2.5% to $5.52 billion.

Real estate investment trust assets also increased this year. Cohen & Steers Capital Management Inc. was one of the big gainers, with REIT assets up 37% to $5.1 billion. The increase was due to positive net flows and market appreciation, Anthony Ialeggio, senior vice president and director of global marketing at Cohen & Steers, wrote in an e-mail.

“Generally, flows came from institutional separate accounts, as well as subadvisory mandates for both U.S. and non-U.S. investors, as they continued the trend of adding liquidity to their [real estate] portfolios,” he wrote.

Other REIT managers in the top three were Morgan Stanley, whose assets grew 26% to $6.7 billion, keeping it firmly in first place on the ranking, and Invesco Ltd., whose assets rose 31% to $4.73 billion.

In real estate equity, J.P. Morgan Asset Management was again in the top slot with $18.9 billion, an increase of 21%. Prudential Financial Inc. was second with $16.4 billion, up 21%, while TIAA-CREF was third with $15.8 billion, up 13%.

“I think the story is pretty straightforward. Investors saw value in the asset class. The green light went on in late 2009 and early 2010, and most of the focus was in the core space,” said Joseph Azelby, managing director and head of the global real assets group at J.P. Morgan Asset Management “We are really well-positioned for those capital flows.”

J.P. Morgan has one of the largest core-commingled funds in the industry — the Strategic Property Fund, with a net asset value of $13.5 billion — “which weathered the storm as well as one could expect,” Mr. Azelby said. The fund’s NAV dropped with the market, but the properties were “quick to recover,” he said.

In addition to the recovery of real estate portfolio values, a record amount of new real estate capital came to J.P. Morgan. Net inflows in 2010 were about $2 billion, Mr. Azelby said.

ING SPINS OUT TORCHLIGHT

Assets of ING Clarion/ING Real Estate rose 15% to $9 billion. During the year, a subsidiary that manages real estate debt spun out and is now called Torchlight Investors. The numbers reported for year-end 2010 are not affected by the sale of ING Clarion Partners to its management and private-equity firm Lightyear Capital LLC, and the sale of three of ING Real Estate Investment Management’s businesses to CB Richard Ellis Group Inc., Mike MacMillan, a spokesman for ING Real Estate, wrote in an e-mail. Both transactions were announced in February 2011 and are not expected to close until the second half of the year.

“I view 2010 as the watershed year” for real estate fundamentals,’ said Peter Muoio, senior principal with real estate research and advisory group Maximus Advisors. “It was the end of the downturn and, in some cases, the beginning of the next cycle.”

Real estate fundamentals, which include rental and occupancy rates, stopped declining. But for property values, it was a story of bifurcation between “top-tier and trophy assets versus everything else,” Mr. Muoio said.

“You had to distinguish between big assets in the top six cities, where values went up, and troubled assets, which saw their valuations going down,” he said.

Tops for infrastructure managers in 2010 was J.P. Morgan, whose assets rose 36% to $1.54 billion. Morgan Stanley was second with $952 million, the same amount it reported in 2009. Capital Innovations LLC was third with $800 million, down 27% from a year earlier.

“We continued to see strong interest in the infrastructure asset class. Long-life assets with steady cash flows are something clients want more of,” Mr. Azelby said.

Both new capital commitments and asset appreciation helped boost the firm’s infrastructure assets.

“Infrastructure inflows were not as dramatic as real estate inflows. Infra-flows were steady, and real estate inflows, in core, were dramatically larger than we expected going into last year,” Mr. Azelby said.

J.P. Morgan had $1.2 billion in infrastructure capital flows globally in 2010.

Arleen Jacobius is a reporter for sister publication Pensions & Investments.