Survey Shows Pensions Exert Caution Over Emerging Market Debt

(March 28, 2011) — An Aberdeen Asset Management survey has shown that schemes remain cautious over emerging market debt.

Aberdeen, the global investment management group overseeing more than $287 billion of assets for institutions and private individuals, reported that limited knowledge about emerging market debt was perceived as the most popular roadblock to investing. Nevertheless, the firm acknowledged the significant value of investing in the asset class. “Emerging Market Debt (EMD) has generally remained one of the best performing asset classes for over 10 years, despite high-profile crises,” the firm stated. “In our view EMD has the potential to enhance returns, providing diversification benefits for investors. We believe that most investors should at least allocate a modest holding to emerging debt, while investors more tolerant of risk should consider a more significant holding.”

The findings from Aberdeen’s latest Pensions Intelligence white paper revealed that 76% of schemes polled agreed emerging market debt can offer diversification benefits, and one-third of pensions interviewed expect to boost their emerging market debt allocation in the next year. However, respondents said that the asset class is often overly complicated, thwarting the ability to conduct due diligence.

Despite the revealed skepticism among pensions, large funds have taken steps to boost their allocation to EMD in recent months. The Pacific Investment Management Co. (PIMCO), manager of the world’s largest mutual fund, has strayed away from bonds, expressing beliefs that the fixed-income rally of the past three decades is nearing its end. PIMCO’s Bill Gross has said that the $237 billion Total Return Fund will soon hold no government debt for the first time in over two years, while cutting its mortgage-backed securities from 42% to 34% of holdings. Instead, the fund is moving toward EMD, upping its holdings in this category to 10% of its total assets.

Commenting on the general inclination to stray from US government-related debt, NEPC Chief Investment Officer Erik Knutzen told aiCIO: “Such a move can reflect the view that the risk-reward for US government securities has changed over the last couple years. Rates have gone higher and will continue to go higher, and the potential of inflationary pressures on rates could translate to higher interest rates and higher growth in other parts of the world, such as emerging markets. So reducing government debt at this time is consistent with overall themes within the economic market environment.”

Further evidence of the increased attention to EMD comes from a January study by Pensions Week, which found that schemes have reported favoring EMD over developed market debt. The study of investment consultants showed eight out of 13 leading EMD fund managers say they expect 7% to 9% returns across the asset class in 2011.