Low interest rate environments in many developed nations, alongside increasingly volatile equity markets, are leading pension funds to adapt their investment strategies. In their search for yield, many are looking outside their borders as well as investing in alternatives, according to a new report by the Association of the Luxembourg Fund Industry (ALFI) produced by PwC Luxembourg.
The report, which examines the growth of pension-fund assets, their foreign-investment limits, and other key trends, shows that pension-fund assets globally are expected to grow at a 5.4% Compound Annual Growth Rate (CAGR) between 2018 and 2025, rising from $42.2trn to $61.1trn. Latin American pension funds are expected to see the strongest CAGR with assets soaring by over 12% to reach $2.4trn.
In terms of asset allocation, equity continues to hold the crown, accounting for 38% of total pension assets at the end of 2018. However growth, in percentage terms, has turned negative - with allocation falling from 60% in 1998. Alternatives are expected to play an increasingly important role in pension funds' portfolios as they continue to search for yield. In absolute terms, pension fund alternatives AuM has risen from $9.2trn in 2014 to $11.6trn at the end of 2018.
Globally, regulations governing pension fund foreign exposure continue to differ drastically. While the majority of countries examined do not set any limits regarding foreign investments, some have set limits for non-OECD or non-EEA countries. Additionally, others have set limits for specific asset classes. Overall, however, there has been an increase in pension funds' foreign exposure since 2014, rising from 31% to 34% at the end of 2018.
Corinne Lamesch, ALFI chairperson, commented: "Pension fund regulations still differ from one country to the other. In particular, some countries restrict the amount pension funds can allocate to investment funds or foreign investments. Consequently, navigating the terrain of complex local requirements can be challenging for asset managers."
Oliver Weber, head of Asset and Wealth Management, PwC Luxembourg, commented: "In light of the current global investment environment, pension funds, with their ability to weather periods of market instability, are also upping their allocations to alternatives, including notably illiquid assets such as private equity and infrastructure. In search for diversification, pension funds are not only looking in terms of asset class, but also geography. They are going beyond their borders in search for growth - either through direct investments or, increasingly, using funds such as AIFs or Ucits."