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'Short-sighted' pension funds ignoring emerging market debt

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UK - Pension schemes must look more closely at emerging market debt as a source of investment, Aberdeen Asset Management has urged.

A survey commissioned by the manager found only a quarter of the more than 100 UK schemes questioned allocated money toward emerging market bonds, despite predictions EM GDP will account for half of total global annual worth by 2017.

The report criticised this attitude as "short sighted", arguing that the long-term prospects for the market remain strong.

Richard Dyson, client director at Aberdeen and co-author of the report alongside Alistair Byrne of Cass Business School's Pensions Institute, said: "Dubbed as the 'engine rooms' of the global economy, their rising middle classes, abundant natural resources and strong public finances make them, arguably, better placed to service their debt than their so-called developed counterparts."

Asked which of the following reasons made them consider emerging market debt (EMD), 76% of respondents to Aberdeen's survey said it would serve as a tool for increased diversification, while more than half cited the potential high returns offered.

Only 11% said the asset class offered no significant attractions.

However, contrasting with the 24% of schemes that invested in developing country debt, more than four-fifths allocated funding to emerging market equities.

The average weighting for the latter asset class was at 5.2%, more than 2 percentage points higher than for debt.

Nevertheless, around a third of schemes intended to increase allocation to EMD over the next 12 months, while 46% of respondents expected higher exposure to happen within the next three years.

Dyson conceded that emerging market debt was not new as an asset class and potentially needed more attention paid to it from a number of sources within the pension fund community.

"As EMD competes with other specialist asset classes for attention and governance budget, it is clear there is a strong need for consultants and fund managers to do more to help pension scheme trustees understand the asset class," he said.

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