GLOBAL - Pension funds should be investing at least 50% of their assets in emerging markets, Ashmore head of research Jerome Booth suggests.
In an interview with Global Pensions, Booth (pictured) said an "agency problem" - or conflict of interest - had arisen between pension fund members, trustees and investment boards which results in schemes continuously investing in economies considered low risk and withdrawing from areas regarded as high risk, even when all the evidence points to the contrary.
As a result, pension funds should start questioning long-held asset allocation and risk assumptions, Booth argued.
"We have an industry which because of the agency problem does not like to think or do anything dangerous and is massively inclined to herding," he said.
"Pension funds in the OECD have $22trn under management and the incentives of the people managing this money and their advisors are often quite a long way off from the real interest of the underlying pensioners. This prevents them, for example, from investing more in emerging markets than they currently do because of this perceived risk.
"Pension funds should have 50% of their assets invested in emerging markets and that is simply a neutral position. I personally have 95% of my savings invested in emerging markets and that is because I am risk-averse and very concerned about the stability of European markets.
"The best measure of future income is past income and you just need to look at GDP growth to see how these emerging countries are growing."
Booth said the tendency for pension funds investing in emerging market to opt for equities ahead of more stable asset classes such as debt, was a confusing one.
Funds should instead look at sovereign debt first, both in local currency and dollars before considering increasing their exposure to corporate debt and real assets, he said.
"The way to manage emerging market equities is to do so very actively, and pension funds need to ask themselves whether they have the stomach for that volatility," he added.
"If they are currently invested in UK equities, the answer is clearly yes."
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