Pensions Champion Emerging Market Debt

(January 24, 2011) — Pensions have reported favoring emerging market debt over developed market debt, accreting to a survey by Pensions Week of investment consultants.

According to the survey’s respondents, which included Towers Watson, Mercer, JLT, and Aon Hewitt, eight out of 13 leading EM debt fund managers say they expect 7-9% returns across the asset class in 2011.

While Russia was believed to be the biggest country allocation in four of the funds surveyed, three others favor South Africa and Mexico, and two more go for Brazil, the Financial Times reported. “We have a large weighting in Russia 2030 bonds, which tend to be a highly liquid proxy for the overall market,” Damien Buchet, head of emerging market fixed income at Axa Investment Managers, told the FT.

With emerging markets set for further heavy inflows of investment, fund managers have expressed continued confidence in emerging markets as a top 2011 bet, fueled by double-digit returns, rising incomes, and rapid economic growth. According to the Institute for International Finance (IIF), equity portfolio flows to emerging markets are set to reach $186 billion this year and will be more than double the $62 billion annual average seen between 2005 and 2009. The findings by Pensions Week support earlier findings from a survey by Deutsche Bank, which pointed to a continued desire to focus on emerging markets and alternative strategies, such as long-short equity, macro funds and special situations, as opposed to US equity.

The report — compiled late last year by Deutsche Bank Pension Strategies & Solutions — discovered that hedge funds have emerged as one of the most popular areas for future investment, particularly among public and corporate defined benefit plans. While 46% of respondents anticipate increases to emerging markets and 41% for hedge funds over the next 12 months, 44% said they would like to decrease their exposure to US large-cap equities. Meanwhile, 38% said they would like to reduce exposure to small-cap equities.