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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension schemes urged to consider emerging markets

Pension schemes should allocate a substantial portion of their growth assets to both equity and debt in emerging markets, according to JLT Investment Consulting


The firm noted schemes’ traditionally low exposure to emerging markets, but highlighted figures from the International Monetary Fund’s September 2011 World Economic Outlook which forecast annual emerging market growth of 6.5% between 2012 and 2016. This compared with predicted annual growth of 2.5% for advanced economies.

"Higher productivity growth rates, lower exposure to debt, favourable demographics, and rapid urbanisation and wealth creation mean that we expect emerging economies to grow faster than developed economies,” said Alex Weiland, senior investment consultant at JLT.

"The global rebalancing that is taking place leads us to expect a strengthening of emerging market currencies over time, which should benefit sterling investors.

Weiland expects greater volatility from the sector but believes that this can be ‘dampened’ by adopting a multi-asset approach.

JLT urged schemes to consider a combination of equity, debt and other asset classes to achieve a diversified exposure to emerging economies, but noted that smaller plans may be constrained in terms of governance from appointing a number of EM managers across various asset classes.

"Account will need to be taken of existing EM exposure, particularly where a scheme employs one or more diversified growth managers,” said Weiland.

“We firmly believe that in inefficient markets such as EM, our clients should consider active managers, unconstrained by an index benchmark, but with an eye on their capacity to handle increasing assets under management.

"Markets remain at a point where making meaningful allocations now should be rewarded. We are overweighting EM, both equity and debt in the advice we give to, and portfolios we run for, our clients."

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