GLOBAL - Emerging markets are likely to be the main generators of global GDP growth for the next decade or more, but European pension funds' exposure to these markets remains low.
In spite of a significant increase in recent years, European pension funds' allocation to emerging markets has stagnated at around 6-7%, according to top executives interviewed in IPE's Top 400 Asset Managers 2011 survey.
Several asset managers called for a radical change, with some suggesting the allocation to the region should be increased to as much as 20%.
Amundi Asset Management chief executive Yves Perrier said: "Today, institutional investors are underweight in their exposure to emerging markets, with only 6-7% of their assets dedicated to emerging markets via equities or bonds.
"By 2030, the market capitalisation of emerging markets is expected to reach up to 50% of the world market cap, with China being above the US and twice the size of Europe. This gives a broad idea of their potential regarding institutional portfolios."
Equities and corporate bonds remain the most common asset classes, but executives in IPE's survey said exposure should apply across all asset classes from emerging market debt to equities and alternatives such as real estate, infrastructure and private equity.
Udo Frank, global chief executive at RCM, said: "A diversified strategic exposure to growth in emerging markets should consist of equities, local currency, fixed income, real estate and private equity.
"Furthermore, commodities and investments in companies in the developed world that benefit to a significant degree from emerging market growth are important components.
"Depending on the overall risk budget and liquidity constraints of an investor, the exposure overall should be above 20%, more in the direction of 35-40%."
Several European pension funds have already adapted their investment strategy to invest in alternative assets in emerging countries.
Last month, the asset manager for the Dutch healthcare and social work sector, PGGM, told IPE it wanted to expand its infrastructure portfolio in emerging markets where the needs in this asset class have been growing exponentially over the last years.
But the allocation to emerging markets will depend on each pension scheme's risk appetite and investment strategy over the long term.
Patrick Disney, managing director institutional at SEI, said: "It is important to note that asset allocation within a pension portfolio should be customised to the financial strength of the organisation and the long-term goals of the pension scheme."
Asset managers in IPE's survey agreed that emerging markets would be the main economic growth driver in the coming decades, comparing the situation in those countries with developed markets.
One of the members of the managing board of directors at Union Investments, Alexander Schindler, said: "In contrast to many developed markets, numerous emerging markets are not struggling with public debt. Many companies achieve an earning growth of 25-30% per year and are issuing bonds to finance expansion.
"With a young and growing population, emerging markets offer the opportunity for a 'demographic hedge'."