Schemes should look at emerging markets - study

GLOBAL – Pension schemes in the developed world should look at investing in emerging markets in the light of the shift to defined contribution, problems with PAYG and funding gaps, a study published by the International Monetary Fund argues.

“From an investment perspective, investing in emerging markets can be beneficial to pension funds from a long-term investment (or strategic asset allocation) perspective and from a short-term investment (or tactical asset allocation) perspective,” said IMF economist Jorge Chan-Lau.

“The growth of the pension fund industry has profound potential implications for the emerging market asset class,” states the report, which does not necessarily reflect the views of the IMF.

And it reveals that “market sources indicate that the search for excess yield has prompted some pension funds in continental Europe to start investing in local emerging market bonds”.

The 29-page study says there are three factors which could increase pension fund allocations to emerging markets. These included the shift towards corporate defined contribution plans – which may mean “more emphasis on investment strategies based on maximizing risk-adjusted returns”.

Another reason was the pressure faced by government pay-as-you-go systems to move towards fully funded systems – which would “increase demand for financial assets that may benefit emerging markets”.

And corporate pension funds’ funding gaps mean they are “looking into emerging markets as a potential source of yield pickup”.

But Chan-Lau argues that “herd behaviour” – both by investment consultants and asset managers - “may remain a problem for the emerging market portfolios of European pension funds”.

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