New Trends in Asset Allocation: Mercer Report Takes the Pulse of Retirement Plans across the Globe

Business Wire

Mercer report uncovers asset allocation and investment trends on nearly US$5 trillion¹ in assets under management (AUM) from government, corporate, and mandatory pension schemes across Latin America, the Middle East, Africa, and Asia.
Malaysia’s Employees Provident Fund (EPF) has increased its foreign equity allocation, and increased efforts to diversify portfolios, including higher exposure to alternatives.
Both EPF and government pension fund (KWAP) combined asset allocation maintains a strong bias for domestic equities and Malaysian government fixed income securities.
Globally, exposure to equities has been increasing since 2017 – equity allocations rose approximately 8%, from 32% to 40%, at the expense of fixed income.
Market liberalization is enabling more diversified portfolios through increased exposure to foreign assets at the expense of domestic assets.

KUALA LUMPUR, Malaysia--(BUSINESS WIRE)-- Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC) launches its inaugural issue of Growth Markets Asset Allocation Trends: Evolving Landscape, a report that provides insights on the asset allocation and investment trends impacting pension fund assets of almost US$5 trillion in AUM across Latin America, the Middle East, Africa, and Asia.

Mercer’s report noted significant variation in broad asset allocation among countries, driven by regulatory factors as well as market conditions, such as high levels of local interest rates supporting investment in domestic fixed income and cash.

Of the AUM analyzed, 56 per cent of assets were from corporate and government pension schemes in Asia. Assets from Japan were particularly significant with the funded government pension system in Japan being the largest in the world with US $1.5 trillion in assets.

Globally, average allocations were 46% to fixed income, 40% to equities, 4% to alternatives and 10% to cash/other. This positioning represents an increase in equity and a decline in fixed income over the measurement period, from 32% and 57%, respectively. Significant home biases remain, but Mercer expects the trend of market liberalization to continue as regulatory changes support broader global investment.

In addition to an increase in overall equity exposure, Mercer also noted an increase in foreign assets relative to domestic assets. As a portion of the overall equity portfolio, average foreign exposure increased from 45% to 49%, with even-more-pronounced movements in fixed income, where foreign exposure moved from 16% to 23%. This shift was notable in Japan, South Korea, Malaysia and Taiwan as investors sought greater geographic diversification.

Fiona Dunsire, Mercer’s Wealth Leader for Growth Markets commented, “Investors across Latin America, the Middle East, Africa and Asia are faced with a number of challenges: they seek to achieve better investment outcomes, but in many cases also face regulatory restrictions on the amount of assets they can invest outside their home country, all while addressing ongoing political, economic and demographic shifts.”

She continued, “As investors diversify their portfolios globally, they need to assess how to access the best investment opportunities, and at the right cost.”

Janet Li, Mercer’s Wealth Leader for Asia, said many countries in Asia were seeing evolvements and imminent changes in their pension systems.

“Like other growth markets, Asia is seeing pension reviews and reforms with both the establishment of new and enhanced pensions systems, and a general shift towards defined contributions, away from defined benefit plans,” Ms Li said.

“With more than half of the world’s middle-class residing in Asia and evolvements in pension structure and delivery, effective investment solutions are essential to meeting the future needs of Asia’s ageing societies,” she said.

Regional Breakdown

Asia

Within Asia, we observed materially different allocations from one country to the next. In Thailand and Indonesia, high fixed income and cash balances are prevalent (Thailand’s fixed income allocation was 73%, while Indonesia’s cash balance totaled 45%). Conversely, Hong Kong’s equity allocation of 66% was the highest in Asia, driven largely by Mandatory Provident Fund elections to lifestyle and standalone equity funds. Japan, South Korea, Malaysia, and Taiwan fell in the middle, each holding between 38%-44% equity. South Korea (11%) and Taiwan (9%) had the largest exposures to alternatives.

Japan (+13%) and South Korea (+8%) posted material increases in their equity portfolios over the period as they sought opportunities to increase expected return. There was a notable shift from domestic assets to foreign assets, particularly in Japan, South Korea, Malaysia, and Taiwan, as investors sought greater geographic diversification.

Notes to Editors

The survey reflects different reporting dates by source, though all “current” sources are from 2017-2018 across Latin America, the Middle East, Africa and Asia. 14 jurisdictions are represented in the report data (Argentina, Brazil, Chile, Colombia, Mexico, Peru, South Africa, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Taiwan and Thailand). Prior data comparisons are generally five years prior to the date of the “current” source, but again varies based upon data availability.

Aggregated data was compiled on an asset-weighted basis; therefore, investors with large asset bases skew the data results more so than a smaller investor. Information contained herein has been obtained from a range of third-party sources. Although the information is believed to be reliable, Mercer has not sought to verify it independently.

About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With 75,000 colleagues and annualized revenue approaching $17 billion through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.

¹ Data as of the most recent date available for each country; please consult the full report for details.