GLOBAL - Investments in emerging market debt will help pension funds balance the damage rising oil prices will have on conventional investments, a leading fund manager claims.
A report by the Organisation for Economic Co-operation and Development points out that oil prices are already at their highest levels since December 2000 and could rise further as a result of the threat of war in Iraq.
The OECD calculates that another US$10 rise in oil prices will cause a 1% drop in global growth rates.
But Ashmore Investment Management head of research Jerome Booth believes emerging market debt will help protect schemes from rising oil prices destabilising the global economy, due to the large number of oil-producing nations in the asset class.
He added that there is a strong “ethical” argument for investing in the asset class as it reduces emerging market dependency on Western banks for finance.
He said the problem with banks and other short–term investors was that they immediately withdraw investment in a crisis, with disastrous consequences for those nations.
“When crisis hits a developing country, banks flee. This negatively impacts the capital flows of the country, and thus worsens the crisis.
“But while the secondary market price for bonds may fall, there is no direct balance of payments impact for the country.”
The asset class is also promoted by fund managers for its high returns and its low correlation with developed fixed income markets.
Bloomberg figures showed that the sector has returned 24.9% over the past decade, compared to 10.2% and 9.1% achieved by the S&P 500 and global bonds respectively.
But schemes have been wary of investing in emerging market debut because of well publicised country defaults such as Argentina.
Invesco Asset Management head of emerging market debt John Cleary said: “The headline news increases the perception of risk, but the returns overcompensate for actual risks.
“Emerging countries have to borrow to develop, and you are overcompensated to own this asset class.”
Enhanced powers for The Pensions Regulator (TPR) to prosecute and fine company directors who "wilfully or recklessly" put their defined benefit (DB) pension scheme at risk will be hard to enforce, commentators say.
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Existing master trusts will be forced to pay £41,000 when applying for authorisation under the upcoming regime, the government has confirmed.
UPDATE 2 - DWP publishes DB white paper: Stronger powers for TPR, DB chair statements to be introduced
The Pensions Regulator (TPR) will be given the power to fine company bosses who deliberately puts their defined benefit (DB) schemes at risk, the government has confirmed.