Where Are Your Equity Assets Really Invested?

Investors may have a far lower exposure to their domestic market than they expect, according to new research.

The report, commissioned by the UK’s Society of Pension Professionals (SPP), showed that the equity allocation of defined contribution (DC) default funds typically had a far greater exposure to emerging markets and Japan than the geographic data shown to investors indicates.

“At the same time, the bias towards ‘home’ country companies is declining as professional investors expand their options.” —Steven Kowal, MSCIThe SPP reported that, while DC default funds on average allocated 41% of their equity exposure to the UK market, only 13.6% of companies’ total revenue was sourced in the UK, according to analysis of indices by MSCI.

Funds allocated an average 6.1% to emerging and frontier markets, but the global nature of companies listed elsewhere meant the average fund had an underlying exposure of 22.9% to this sector.

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Source: MSCI, Society of Pension Professionals

MSCI’s Steven Kowal, executive director in the firm’s index business, said the country in which a company is listed “is becoming increasingly less relevant than where its revenues are derived”.

“At the same time, the bias towards ‘home’ country companies is declining as professional investors expand their options,” he added.

Olivier Lebleu, head of international business at Old Mutual Asset Management, which contributed to the report, said the data was “lifting the veil” on DC default fund construction as savers’ reliance on this form of pension saving increases.

“While the UK weighting by economic exposure is significantly below that suggested by an analysis of listings,” added Duncan Buchanan, president of the SPP, “we should remember that according to the 2013 IMF [International Monetary Fund] figures the UK only contributes 2.28% to global GDP, so a lower allocation in a globally diversified portfolio may actually be more appropriate.”

One of the Netherlands’ biggest pension funds has “all but eradicated” its allocation to hedge funds.

Pensioenfonds Zorg en Welzijn (PFZW), which runs pensions for the country’s health and social care workers, cited complexity, costs, and sustainability issues with the asset class in a statement published this morning.

“With hedge funds, you’re certain of the high costs, but uncertain about the return.” —Jan Willem van Oostveen, PFZWFollowing the adoption of a new investment strategy, hedge funds no longer fit the investment criteria for the €156.3 billion ($184.7 billion) pension. PFZW was one of the first Dutch pensions to allocate to hedge funds, initiating a position in 2003. Asset manager PGGM, which was split out of the fund in 2008, is responsible for the fund’s investments.

“With hedge funds, you’re certain of the high costs, but uncertain about the return,” said Jan Willem van Oostveen, manager for financial and investment policy at PFZW.

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The pension also voiced concerns over the “often limited concern for society and the environment” expressed by hedge funds.

“For a long time, hedge funds were a useful tool [for diversification], but lately they have not made a sufficient contribution to this objective,” the statement added.

PFZW has increased its target allocation to equities as a result of the removal of hedge funds from its long-term plan.

In 2013, 2.7% of PFZW’s assets were invested in hedge funds. According to its third-quarter report, this had fallen to 2% by the end of September 2014.

The decision follows the California Public Employees’ Retirement System’s move—announced last year—to cut hedge funds from its portfolio because the allocation was not scalable.