Pension funds are moving away from investing in domestic equities, says research group Greenwich Associates. And what it calls a “global standard” of investment management methods is emerging.
Pension asset management practices, which have remained largely domestically driven, are slowly converging towards a global standard, says Greenwich in a report. It surveyed 1,400 plan sponsors worldwide in spring this year and found “strong moves“ away from investing in domestic equities for the US, UK and Japan. Continental Europe saw a slight rise in pan-European investments, which it says is due to the introduction of the euro.
Explains Greenwich consultant and author of the report, Chris McNickle: “Following the introduction of the euro, a domestic market for Europe has expanded. Pension funds try to match liabilities and assets in the same currency, which they can now do with a much larger pool of companies available to them to invest in.”
He added: “This explains the increasing investment in ‘domestic equities’ for Europe. However, it is expected to stabilise in the near future and we should see European pension funds increasing their investments in US equity. As they become more familiar, as infrastructure and knowledge increases, we should see a shift towards international investing.”
“Many funds expect to increase their holdings in US equities over the next three years. It is current market volatility that has discouraged them so far. As US equities make up the majority of global equity supply, funds will eventually reflect this in their holdings.”
The rapid rise in defined contribution (DC) schemes varies widely from market to market, but the trend remains the same. In the US, projected growth in DC asset share is from 42% to 64% in 2011; in the UK projected DC asset share is from 15% to 22% in 2012, and in continental Europe from 40% to 47% in 2012.
According to Greenwich, the move towards a global investment management standard – in the form of the use of external managers and consultants as well as fees paid - is being driven by the decline in equity values, public and political concerns about retirement benefits problems, and plan sponsors’ increasing sophistication.
Says McNickle: “We certainly don’t expect rapid and dramatic shifts, but we do expect practices everywhere to come closer to global approaches during the next five to ten years.”
Institutions are using more managers worldwide. In continental Europe the mean number of managers employed has risen from 7.6 in 2001 to 8.8 in 2002. In the US the figure has risen from 13.3 to 14.7 and in the UK from 3.8 to 4.2. “This is due chiefly to the increasing adoption by funds of the core/satellite model, with the subsequent hiring of additional speciality managers. “ says the report.