More and more pension funds are making their securities lending programmes work harder for them by expanding into emerging markets, as Helen Fowler reports
Pension funds are expanding their securities lending activities in emerging markets with many now lending out assets in newer and riskier markets in an attempt to secure higher fees and compensate for low returns available in developed countries.
Officials at the Ohio Public Employees Retirement System (OPERS) are already considering expanding their programme to include new countries. Meanwhile, the amount of emerging Asia stocks alone available for borrowing by institutional investors has soared 27% over the past year and a half, according to analysis by Data Explorers.
OPERS is planning to increase its securities lending in emerging markets. “We expect it [emerging markets] to step up and become more significant,” said Jerry May, securities lending and cash manager at the 11th largest public pension fund in the US, with $78bn in assets, more than $2bn of that in emerging markets.
The Ohio scheme has already upped its focus on emerging markets. “Over the last few years there has been more of a focus on emerging markets,” said May. “We are lending more there than we did five years ago. I suspect we are not alone in this regard. We are probably doing what most of our peers are doing too.”
OPERS concentrates its emerging market lending on Hong Kong and a little bit on South Korea. “Those two markets have got specialness and intrinsic value,” said May. The Ohio scheme is looking at other emerging markets, including Taiwan, Brazil and Poland, although it has not yet taken the plunge in these countries. “It is early for India and China,” said May. “We still monitor all of them.”
According to Data Explorers, investors are becoming keener to lend out Asian equities. The amount of emerging Asian stock available for borrowing by institutional investors has risen from $652bn in May last year to $1trn by July. The amount dropped to $828bn in early October because of underlying market movement.
Lendable Asian assets currently outnumber stock out on loan – a key measure of supply and demand in lending markets – by nine times, up from its ratio of just five back in September 2007. The measure indicates how rapidly investor appetite for lending out assets in Asian emerging markets has increased in the last four years.
“It’s worth looking back to the Lehman crash,” said Will Duff Gordon, London-based research director at Data Explorers. “The value of the lendable supply fell sharply, reflecting falling equity prices and a withdrawal of funds from lending programmes as institutional investors stopped engaging in securities lending.”
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