A major reason pension funds are rethinking their asset allocations is an increased exposure to private assets — due, largely, to the denominator effect.

Pension plans with private investments have seen that part of the portfolio “hold up pretty well vs. public equities and bonds that are down double digits this year,” said Sona Menon, Boston-based head of North American pension practice at Cambridge Associates LLC. “This is a combination of what we call the denominator effect — because the broader portfolio has shrunk — (and) the numerator effect, because private assets have done well.”

The MSCI ACWI index is down 17.5% for the year through Aug. 31. The 10-year Treasury yield is at 3.9%, compared with 1.5% at the end of last year, and U.K. 10-year government bonds surged to 4.5% on Sept. 27 before falling to 4.14% on Sept. 29.

On the other hand, private market asset returns — which sources said typically lag public markets by a quarter — are looking relatively good. In real estate, for example, the National Council of Real Estate Investment Fiduciaries Fund Index-Open-end Diversified Core Equity returned a net 4.5% in the second quarter, following 7.1% for the first quarter.

It’s meant some pension funds that might have had a 10% target allocation to private markets may suddenly have found themselves with a 15% or even 20% exposure, just by doing nothing.

“The U.S. is probably the most exposed (to this increase in private markets allocation), partly because they’ve suffered the most from the denominator and numerator effect,” said Peter Hobbs, London-based managing director, head of private markets at consultant bfinance U.K. Ltd. “Their private assets portfolios have gone up hugely, just because of what the markets have done.”

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