India, Energy, Investment Grade: What You Wanted in 2014

Flows into funds investing in India, energy projects, and good quality corporate debt hit record levels in 2014, according to new data.

A new Indian prime minister, a potential energy crisis, and increasing fears of default meant these funds received $4.6 billion, $22.2 billion, and $202 billion respectively, research from EPFR showed.

Indian equities reversed their 2013 story, recouping more than the $4.1 billion of outflows suffered in the previous year with $4.6 billion backing Narendra Modi’s plans to tackle corruption in the country’s business world.

Flows to energy funds increased almost sixfold—up from $3.8 billion in 2013 to $22.2 billion—while investment grade debt benefited from investors shunning the risk they took in the previous 12 months. This asset class turned around a $60.8 billion outflow in 2013.

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Investors also pulled their highest number of assets from some previously well-loved sectors in 2014, displaying fears for their future economic trajectories. Chinese and German equities lost a record $7.6 billion and $14.3 billion in outflows over the last 12 months, although each was buoyed by new investor cash in the last quarter of the year.

Emerging market equities as a whole, which had seen record outflows of $26.7 billion in 2013, saw more assets head for the door last year. However, the lower annual $24.7 billion figure—with a $21.4 billion exit attributed to the last quarter of the year—showed some investors still believed in the sector’s story.

With an additional $184 billion, developed market equities received substantial inflows, but this figure was less than half of the $385.1 billion investors plunged into the asset class in 2013.

Liquidity was on investors’ minds towards the end of the year as a $112 billion inflow to global money market funds pulled the sector to gain overall net new money of $39.3 billion in 2014.

The UK’s Merchant Navy Officers Pension Fund (MNOPF) has sealed the first de-risking arrangement of 2015, insuring £1.5 billion of pensioner liabilities against longevity risk.

The £2.4 billion MNOPF established its own wholly-owned insurance company in Guernsey, MNOPF IC Ltd, to take on the longevity risk. Pacific Life Re then reinsured the liabilities against the risk of the 16,000 pensioners covered by the deal living longer than expected.

“This transaction is an important development for MNOPF and for the longevity hedging market in general.”—Shelly Beard, Towers WatsonThe longevity swap arrangement echoes that of the BT Pension Scheme, which last year also set up its own insurance subsidiary to aid a £16 billion de-risking deal—the UK’s biggest ever de-risking move.

MNOPF Chairman Rory Murphy described the longevity swap as “a positive step on our journey to achieve full funding”. It follows a full buyout of MNOPF’s “Old Section” in the summer of 2014, with Legal & General and Rothesay Life sharing a £1.3 billion bulk annuity arrangement.

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Longevity was a “significant, concentrated risk” for MNOPF, Chief Executive Andrew Waring said. He added that attractive pricing helped the hedge to be put in place “without any material impact on our broader journey plan”.

Shelly Beard, senior consultant at Towers Watson, which helped structure the deal, said establishing an insurance subsidiary can make hedging more affordable for pension funds.

“It also reduces the complexity that is often associated with longevity hedging—the contractual negotiations on this transaction took less than two months,” she added.