GLOBAL – A new academic study has found that international investment brings better returns and that the reasons for limiting foreign investing are weak.
“Data confirm theory that international investment allows superior investment performance in terms of risk and return,” said E. Philip Davis, Professor of Economics and Finance at Brunel University in London in a new paper, ‘Pension Fund Management and International Investment – A Global Perspective’.
“We have shown that pension funds are well placed to take advantage of the benefits of international investment, to an extent that depends on the maturity of the fund and the investment approach.”
Davis notes “sizeable differences” in international investment by the pension fund sectors in the countries he studied. He says: “Whereas some degree of home bias is likely to occur naturally, it is undesirable for regulations to enforce tighter limits on foreign assets than these market forces would suggest.
“The arguments favouring such restrictions are weak.”
This was because in small countries, such as the Netherlands and Singapore, the assets of pension funds and other institutional investors may exceed the entire domestic equity market.
He argues that while the future of funding itself is “likely to be turbulent” this does not negate the case for international investment. But the situation does “suggest a need to retain elements of a pay-as-you-go system, as a form of insurance”.
This study seeks to clarify the role of international investment in pension fund investment strategies. It draws on experience of OECD countries and of selected emerging market economies with established funded pension systems.