- Mercer report uncovers asset allocation and investment trends on nearly US$5 trillion in assets under management (AUM) from government, corporate, and mandatory pension schemes across Latin America, the Middle East, Africa, and Asia.
- Hong Kong has the highest exposure to equities (66%) of the countries surveyed, while Indonesia had the smallest (7.8%).
- Japan and South Korea posted material increases in equity portfolios at the expense of fixed income and bonds.
- Globally, exposure to equities has been increasing since 2017 – equity allocations rose approximately 8%, from 32% to 40%, at the expense of fixed income.
- Market liberalization is enabling more diversified portfolios through increased exposure to foreign assets at the expense of domestic assets.
Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC) launches its inaugural issue of Growth Markets Asset Allocation Trends: Evolving Landscape, a report that provides insights on the asset allocation and investment trends impacting pension fund assets of almost US$5 trillion in AUM across Latin America, the Middle East, Africa, and Asia.
Mercer’s report noted significant variation in broad asset allocation among countries, driven by regulatory factors as well as market conditions, such as high levels of local interest rates supporting investment in domestic fixed income and cash.
Of the AUM analysed, 56 per cent of assets were from corporate and government pension schemes in Asia. Assets from Japan were particularly significant with the funded government pension system in Japan being the largest in the world with US $1.5 trillion in assets.
Globally, average allocations were 46% to fixed income, 40% to equities, 4% to alternatives and 10% to cash/other. This positioning represents an increase in equity and a decline in fixed income over the measurement period, from 32% and 57%, respectively. Significant home biases remain, but Mercer expects the trend of market liberalization to continue as regulatory changes support broader global investment.
In addition to an increase in overall equity exposure, Mercer also noted an increase in foreign assets relative to domestic assets. As a portion of the overall equity portfolio, average foreign exposure increased from 45% to 49%, with even-more-pronounced movements in fixed income, where foreign exposure moved from 16% to 23%. This shift was was notable in Japan, South Korea, Malaysia and Taiwan as investors sought greater geographic diversification.
Fiona Dunsire, Mercer’s Wealth Leader for Growth Markets commented, “Investors across Latin America, the Middle East, Africa and Asia are faced with a number of challenges: they seek to achieve better investment outcomes, but in many cases also face regulatory restrictions on the amount of assets they can invest outside their home country, all while addressing ongoing political, economic and demographic shifts.”
She continued, “As investors diversify their portfolios globally, they need to assess how to access the best investment opportunities, and at the right cost.”
Janet Li, Mercer’s Wealth Leader for Asia, said many countries in Asia were seeing significant change in their pension systems.
“Like other growth markets, Asia is seeing material pensions reforms with both the establishment of new pensions systems and a shift towards defined contributions, away from defined benefit plans,” Ms Li said.
“With more than half of the world’s middle-class residing in Asia and changes in pension structure and delivery, effective investment solutions are essential to meeting the future needs of Asia’s ageing societies,” she said.
Within Asia, we observed materially different allocations from one country to the next. In Thailand and Indonesia, high fixed income and cash balances are prevalent (Thailand’s fixed income allocation was 73%, while Indonesia’s cash balance totaled 45%). Conversely, Hong Kong’s equity allocation of 66% was the highest in Asia, driven largely by Mandatory Provident Fund elections to lifestyle and standalone equity funds. Japan, South Korea, Malaysia, and Taiwan fell in the middle, each holding between 38%-44% equity. South Korea (11%) and Taiwan (9%) had the largest exposures to alternatives.
Japan (+13%) and South Korea (+8%) posted material increases in their equity portfolios over the period as they sought opportunities to increase expected return. There was a notable shift from domestic assets to foreign assets, particularly in Japan, South Korea, Malaysia, and Taiwan, as investors sought greater geographic diversification.
Broad Asset Allocation by Country: Current (%)
Broad Asset Allocation by Country: Prior (%)
Many countries within Latin America hold relatively high allocations to fixed income, led by Brazil (73%), Argentina (65%), and Mexico (64%). This positioning is driven in part by regulatory restrictions supporting local assets, as well as high local interest rates. Conversely, Peru and Colombia held the highest allocations to equities, with 51% and 39%, respectively. When considering alternative investments such as hedge funds, real estate, and private equity, Argentina and Mexico had the highest within Latin America, representing 7% each (in Mexico this was comprised of 5% private equity and 2% real estate/infrastructure, while in Argentina this was entirely in real estate/infrastructure).
There is a large variation among Latin America countries’ investment in foreign assets, particularly as a percentage of the equity portfolio. Argentina and Brazil have minimal foreign exposure, while Peru (76% foreign equity as a percent of total equity), Chile (68%), and Mexico (68%) hold more sizeable allocations. Colombia demonstrated the largest increase in foreign equity holdings over the period, rising from 48% to 55% of the equity portfolio. In Brazil, Colombia, Mexico, and Peru, there have been recent changes in legislation to allow increased foreign asset exposure.
Within South Africa, Alexander Forbes’ Global Manager Watch™ Survey observed that portfolios increased their allocations to growth assets over the measurement period, as well as increasing their holdings of foreign equity at the expense of domestic equity. This shift was made possible by relaxed regulatory restrictions limiting offshore investments, which recently increased to 30% from 25%, with a further 10% available for investment in Africa.
To download a copy of the report, please click here.