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Pension funds in focus

BlackRock |dic 13, 2016

In November 2015, BlackRock commissioned an independent study on pension funds in 10 countries throughout Europe, Asia and the Americas to better understand the challenges and the diversification strategies being pursued by pension funds globally.


About our research

Our research represents the views of 100 surveyed pension fund executives, collectively managing over $3 trillion in assets and is supplemented by 10 in-depth interviews with senior executives from pension funds across the globe.

We found that in the face of an unprecedented combination of challenges, pension funds are increasingly embracing their long-term horizon and adopting greater investment diversification. However, collaboration amongst governments, regulators, and private pensions is vital in order to meet investment needs.

Opportunities in the midst of challenges

Increased investment options are driving diversification

As custodians of private long-term savings facing prolonged interest rates, erratic equity markets and increased longevity, pension funds are under pressure to find new investment channels to drive better returns for their clients. In this landscape, they feel that investing in different markets and asset classes is critical to lowering risks and earning the returns necessary to meet growing future liabilities.

What are the main drivers to invest in foreign assets?

Investment options to balance risk

While respondents were unanimous in their support for greater diversification, regulation constrains them from investing in equities and other markets.

This is particularly true in Mexico, where 71% of AFOREs allocate between 11-20% (the regulatory limit), while the remaining AFOREs allocate less than 10% of their assets abroad.

To deliver a better pension fund to our clients as a system, we have to continue making the argument for easing current limits on asset classes

— Luis Sayeg, CEO of AFORE Banamex

As 86% of Mexican executives – a higher proportion than the Latin American (70%) or global (69%) average – say the performance of their pension funds would improve with more foreign assets in their portfolio, further education and partnership with regulators is vital for their success.

Foreign asset allocation differs globally

Where regulatory restrictions do not exist, globally, pension funds are likely to seek active strategies (79%), index vehicles (61%), or ETFs (53%) as a means to gaining specific market exposure.

In contrast, given Mexico’s restrictions on mutual funds, pension funds primarily invest internationally through exchange-traded funds (ETFs), separately managed accounts (SMAs), derivatives and stock picking.

This dichotomy persists, as highlighted in the likely changes to foreign allocations in the next 12 months.

Foreign asset allocation differs globally

One area of shared momentum across global pension funds is in the growing popularity of alternative investments such as infrastructure and real estate, due to their ability to deliver steady returns.

Although in Mexico alternatives comprise of less than 5% of allocations, positive change is underway as a result of economic reforms opening up opportunities in energy and infrastructure. This is coupled with the dominant view in Congress that savings should be invested domestically.

At the same time, the fall in oil prices has constrained the Mexican government’s ability to fund core infrastructure projects on its own, which provides a key opportunity for pension funds to fill this gap. However, their ability to do so is limited by regulatory constraints.

Education helps overcome barriers to diversification

Investing in new asset classes, whether at home or abroad does not come without its challenges. We found that a lack of local expertise and a bias in favor of domestic assets are the most frequently cited hurdles to diversification. This is just as important as the removal of regulatory barriers.

What are pension funds doing to overcome these hurdles?

The primary focus is on education, which is shared by regulators and the pension fund industry as a whole.

To build local expertise in foreign assets, Mexican pension funds are calling on regulators to make it easier to engage with foreign asset managers, which would result in supplementing where local expertise is limited.

What are the benefits of involving external managers to improve infrastructure investments?

Benefits of involving external managers to improve infrastructure investments?

This is especially true in regards to alternatives, which require particular expertise. At a global level, external managers are working with pension funds to structure their infrastructure portfolios and share their expertise with in-house teams, being valued for their capacity building and strengthening of management skills.

Want more?

Read the full report to dive deeper into our global findings.