GLOBAL - Dutch and Scandinavian pension funds have traditionally led European investment in the so-called frontier markets, but schemes in Italy, Switzerland and Germany - looking to boost returns - are increasingly considering investments in those markets, according to Templeton Asset Management.
Templeton said European pension funds that already had a large exposure to emerging countries were likely to look to frontier markets in the coming months as part of their strategy to diversify the risk within their portfolio and invest in markets lowly correlated to other asset classes.
More and more pension funds are now looking at those markets as inflation is expected to fall or even stagnate in emerging markets over the next few years.
Carlos Von Hardenberg, senior vice-president and managing director for Turkey at Templeton Asset Management, said: "More than 10 years ago, putting capital into emerging markets was also seen as highly risky due to the lack of maturity, but they offered good returns. The same scenario is now looming with frontier markets.
"Pension funds investing in frontier markets is a slow process and not yet mainstream, but it will develop further, as the market is becoming larger and more liquid."
Even though Dutch and Scandinavian pension funds, having already invested in frontier markets, are leading the way, some pension schemes in Italy, Switzerland and Germany are increasingly willing to follow suit.
Ian Wilkins, head of UK distribution at Franklin Templeton Investments, said: "The definition of risk has changed. Some consultants are now looking at more niche strategies and are seeking to find new sources of uncorrelated returns."
Earlier this month, the Danish pension plan, PensionDanmark, announced it was investing DKK52m (€7m) in sustainable energy in sub-Saharan Africa via the DI Frontier Market Energy & Carbon Fund.
The scheme - which is financed by several institutional investors from Denmark and elsewhere, including PFA Pension, TrygVesta and Danica - was expected to contribute a total of DKK600m to the fund.
In November last year, PensionDanmark already invested DKK200m in quoted companies in 10 countries in central Africa, including Nigeria, Kenya, Botswana and Mauritius.
The investments are spread across various sectors, with the retail, telecommunications and financial sectors making up more than 70% of the total.
At that time, Claus Stampe, chief investment officer at PensionDanmark, told IPE: "We are looking at other possibilities and expect to increase our exposure to Africa over the coming year."
That said, the pension fund does not see its exposure to the continent growing to more than 2% of total assets over the next 2-4 years.