Pension funds around the world are increasing their investment exposure to emerging markets in an effort to chase the higher returns needed to cover pension commitments to aging populations, according to Reuters.
The 13 biggest pension markets globally hold combined assets of around $26 trillion, very little of which is focused on emerging markets. But fund managers are beginning to realize potential in an asset class that comprises almost half of the world economy and 13% of global stock indices.
“There are very few pension funds worldwide that have more than 5% of their assets in emerging markets,” Julian Mayo, portfolio manager at Charlemagne Capital, told Reuters. “But our impression is there is definitely a gradual increase in exposure to the asset class by pension funds.”
According to Reuters, Goldman Sachs predicts that western investors will increase their focus on emerging market equities to 18% of total investments by 2030, up from less than6% now.
The Pew Centre, a Washington-based think tank, estimated thatU.S. states’ pensions face a collective shortfall of $600 billion for future benefit payments, underscoring the need to find investments with long-term potential to make up for this gap. Emerging investments tracked by MSCI have returned 30% in dollar terms since 2006, compared to a 7% loss for developed equities.
While such investments would certainly be welcomed by emerging economies’ governments, they could lead to asset class bubbles that some economists think would have significant economic repercussions.
Given these risks, Bank of England economist Andrew Haldane tells Reuters that developing countries are in the midst of a “footrace” to expand supply of investable securities to keep up with investment flows.