GLOBAL - Pension fund equity investment is set to experience "exceptional growth" over the next 10 years, with a substantial flow into non-domestic markets, according to a new report.
The research by Birinyi Associates covering 41 countries says that increased equity purchases by pension funds will impact both mature and emerging markets, with Europe leading the way.
This trend is likely to lead to more cross-border investment, and many funds moving towards a more balanced ‘world’ portfolio in their equity holdings, says the report entitled ‘Pension Reform and Global Equity Markets’.
The study highlights how between 1990 and 1999 global pension fund assets grew an average of 15% per year (from US$4.56m to US$15.87m), whilst equity holdings grew 20% per year (from around US$1.6bn to approximately US$8bn), or a jump from 35% to 51% of total allocated assets.
According to Birinyi this trend is particularly prevalent in Europe, where looser investment restrictions and strong efforts to diversify pension fund portfolios into equities have led to some dramatic changes in allocations , namely in Iceland, The Netherlands, Portugal, Spain and Switzerland. The trend is also accompanied by a general shift towards defined contribution (DC) plans which are typically equity-centric.
The report also illustrates how the pattern is likely to continue because of global pension reforms in the face of burgeoning Pay-As-You-Go (PAYG) models; the relaxation on equity ownership by pension funds as bond yields drop and investors become more comfortable with risk, and restrictions on foreign investment by pension funds are also being reconsidered as financial markets mature and the benefits of risk diversification are recognised.
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