Global pension funds are leaning to Asian emerging markets and private assets for better risk-adjusted returns, according to the latest annual survey of the sector by UK-based research house, Create.
The study, sponsored by French fund group Amundi Asset Management, says following the end of the ‘great moderation’ – a 25-year period of stable growth as well as low inflation and interest rates – pension schemes are rethinking traditional investment allocations.
“With public equity markets in the West flirting with their all-time highs, the search for good risk-adjusted returns is turning the spotlight on two sets of thus far underinvested asset classes,” the Create report says.
Both private assets and Asian emerging markets have been targeted by pension funds as the likely engines of future growth – albeit amid a mood of cautious optimism.
For example, the survey found the “proportion of respondents investing in all Asian emerging markets is likely to rise from 62% to 76%” over the next three years but with a particular focus on “the unique dynamics of each country”.
“This selectivity has been due to big dispersion in [Asian emerging markets] lifetime return outcomes so far…,” the paper says. “On the upside, 32% of respondents had returns that exceeded or far exceeded their expectations; with 31% reporting that they were on par with expectations. On the downside, 37% had returns that fell below or well below expectations. Value premium has coexisted alongside value trap.”
India ranks as the most popular emerging markets equities destination in the survey followed by “South Korea, Taiwan, China, Vietnam, Indonesia and Malaysia, in that order of preference”.
“Indeed, the single country focus is likely to gain traction,” the report says. “This trend is in contrast to the current shift towards global equities rather than country allocations. It is also in contrast to the past practice of investing in broad emerging market indices, where the gap between the best and the worst companies was pronounced, as was their turnover in regular index rebalancing.”
And while the private markets boom looks set to continue, pension funds are also applying greater scrutiny to underlying assets and managers.
“… on a three-year forward view, our respondents expect the outlook to improve for private markets,” the report says. “The proportion of respondents investing in them is likely to rise from 74% to 86%, with rising shares in the asset base… For them, the price of going into private markets is only exceeded by the cost of staying out.”
Private debt tops the list of pension investors preferred sub asset classes followed by private equity, infrastructure, real estate and venture capital.
Likewise, the majority of schemes polled for the Create survey listed North America – especially the US – as the most-favoured private asset hunting ground ahead of Europe, Asia-Pacific, Latin America, the Middle East and Africa.
“In all cases, the focus of new allocations will be on what they see as secular and more predictable sources of value creation emerging from the so-called 4D Revolution – powered by decarbonisation, decoupling, demographics and digitalisation – now in progress in the global economy.”
Create, founded by Amin Rajan, tapped 157 large pension plans in 13 jurisdictions for the 2024 survey – the 11th in the annual series.
Rajan says the findings show that pension funds are re-evaluating asset allocation choices “as they transition to a new investment regime after a sharp break from the prolonged era of cheap money policies, freer markets and globalisation of trade and finance”.