Pension Asset Allocation Insights 2020 Shows Increased Focus on Equities, Rising Exposure to Foreign Assets and Growing Interest in Alternatives in Asia

June 4, 2020 
Singapore, Singapore

• According to a Mercer survey of investor practices in the “growth markets”, which Mercer defines as Latin America, the Middle East, Africa and Asia, asset allocation for Asia ex Japan aligns broadly with growth markets in aggregate but has the highest allocation to alternatives (~8%).
  
• Meaningful exposures to alternatives were also observed with South Korea (12%) and Taiwan (10%) reporting the largest allocations.
• Equity portfolio assets in Asia ex Japan have shifted to 48% foreign equities, up from 34% in the inaugural measurement period. There was a notable shift from domestic assets to foreign assets, particularly in Japan, South Korea, Hong Kong, and Taiwan, as investors sought greater geographic diversification. 
• In a time of heightened market volatility caused largely by the coronavirus pandemic, Mercer stresses investors should remain focused on achieving their strategic objectives, including reviewing their risk tolerance, liquidity budget and diversification strategy to ensure their objectives can be met.

Mercer launches its Asset Allocation Insights 2020, a report that provides insights on the asset allocation and investment trends impacting pension fund assets of almost US$5.2 trillion in AUM across Latin America, the Middle East, Africa, and Asia.

The study indicates that longer term trends apparent in last year’s study continue to progress, with significant changes observed since the study began in 2014, driven by regulatory factors as well as market conditions. Equities now represent a higher percentage of aggregate assets (from 32% to 37%), with a corresponding decline in fixed income. Furthermore, while significant home country biases remain, allocations to foreign assets continue to rise, especially within equity. Alternative investments also gained slightly more traction within portfolios, a trend Mercer expects to persist in the future. Finally, the survey results indicates continued broad pursuit of market trends including increased focus on sustainability/ESG, governance, and fees, but with the response to and application of these trends varying widely by market.

Commenting on the findings of the survey, Fiona Dunsire, Mercer’s Investments and Retirement Leader for Growth Markets, said, “Across Latin America, the Middle East, Africa and Asia, investors are facing critical challenges. They are under immense pressure to achieve higher returns, minimize costs and implement better governance structures, all while responding to global market concerns such as environmental, demographic, technological and geopolitical risks. In a period of heightened volatility, caused by the current COVID-19 pandemic, responding to these challenges becomes even more important – and having an asset allocation plan that is consistent with investors’ investment objectives and risk tolerance is a crucial foundation. In times of market stress we recommend that long-term investors maintain discipline in asset allocation; however, it is also a good time to assess potential scenarios and portfolio risks and prepare for future opportunities.

On the findings of the survey on Asia, Janet Li, Mercer’s Wealth Business Leader for Asia, said, “We are pleased to see pension funds in Asia generally making progress towards the goals they have set– from greater diversification of their portfolios, more advanced application of ESG in overall fund management, and more focus around governance.  As funds seek diversity in their holdings, alternatives have been on the rise since our inaugural survey.  Since longevity risk and the retirement savings gap in Asia continue to be paramount, it is critical for pension funds to plan well in advance and look for ways to enhance yields, riding on the compound interest effect over their investment horizon.” 

While tragic, the COVID-19 pandemic has put a spotlight on the risk and resilience of pension portfolios, Ms Li added. “If some good has come out of the situation, it is that in its wake many businesses and governments have reviewed their pension portfolios and put pension risk at the center of discussions.  All in all, asset allocation is key to determining broadly the direction of returns and thus, asset owners should carve out dedicated time to determine the right strategy,” she concluded.

This year’s report evaluates sixteen markets, including two new countries – India and Turkey – and provides anecdotal insights and commentary for additional markets where data was not available. The 2020 report also segments data in a variety of ways in order to provide investors with a detailed understanding of the investment landscape.  The report is organized according to plan type (defined benefit (DB) or defined contribution (DC)) and plan sponsor (government, including some mandatory plans, or corporate). Download the report here.

Regional Breakdown

Asia

Mercer survey results in Asia vary across countries. India reported the highest fixed income allocation at 93%. Taiwan holds 20% in cash. Hong Kong’s equity allocation of 65% was the highest in Asia, driven largely by the Mandatory Provident Fund elections to lifestyle and standalone equity funds. Japan, South Korea, Malaysia, and Taiwan fell in the middle, each holding between 37% and 43% equity. Meaningful exposures to alternatives were also observed, with South Korea (12%) and Taiwan (10%) reporting the largest allocations.

Japan significantly increased its equity allocation (+13%) over the full measurement period, driven mainly by allocation changes within the Government Pension Investment Fund, the largest constituent within the survey data. Furthermore, there was a notable shift from domestic assets to foreign assets, particularly in Japan, South Korea, Hong Kong, and Taiwan, as investors sought greater geographic diversification. 

The survey highlighted potential opportunities across Asia to consider restructuring retirement plans to enhance sustainability of the funds and ultimately benefit individuals.

Latin America

According to the findings, the asset allocation of Latin American pension funds remains relatively conservative compared to the survey average, with an average fixed income allocation of 65%. Brazil (73%), Mexico (70%) and Argentina (65%) were the largest holders of fixed income within the region due to high local interest rates. On the other end of the spectrum, Peru and Colombia held the highest allocations to equities, at 48% and 36%, respectively. For alternative investments, such as hedge funds, real estate, and private equity, Colombia, Peru and Brazil recorded the highest allocations in the region, representing nine, seven and five per cent, respectively.

The survey also noted a large variation in investments in foreign assets across the region, particularly as a percentage of the equity portfolio, largely due to regulatory restrictions. Brazil and Argentina, for instance, have minimal foreign exposure, while Peru (73% foreign equity as a percent of total equity), Chile (69%), and Mexico (58%) hold more sizeable allocations. Colombia showed the largest increase in foreign equity holdings over the period, rising from 48% to 54% of the equity portfolio.

Middle East and Africa

While there is a large pool of sophisticated investors within the Middle East and Africa region, public data available on the allocations of these investors remains limited. However, this year’s survey included Turkey for the first time and leverages Alexander Forbes’ Global Manager Watch™ Survey and other data to provide coverage of South Africa.

Turkey has high cash holdings, driven mainly by concerns about economic and market volatility, leading to an allocation of over 67% in fixed income and cash combined. Turkey’s government is considering reforms to encourage long-term savings by employers and individuals.

South Africa has one of the highest allocation to equities. In South Africa, managers appear to be leveraging the increased ability to invest offshore, however a key area of concern continues to be the prospect of changing government regulations for local prescribed assets, which may result in a reversal of the trend toward greater investment freedom.    

-Ends-

Notes to Editors

The survey reflects different reporting dates by source, though all “current” sources are from 2018-2019 across Latin America, the Middle East, Africa and Asia. 16 jurisdictions are represented in the report data (Argentina, Brazil, Chile, Colombia, Mexico, Peru, India, South Africa, Turkey, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Taiwan and Thailand). Prior data comparisons are generally six years prior to the date of the “current” source, but again this varies based upon data availability.

Aggregated data was compiled on an asset-weighted basis; therefore, investors with large asset bases skew the data results more so than a smaller investor. Information contained herein has been obtained from a range of third-party sources. Although the information is believed to be reliable, Mercer has not sought to verify it independently.