New global pension report reveals flight to safety

As is typical in volatile and uncertain times, a flight to safety is apparent.

Global public funds will be net sellers of public equity and some higher-yielding fixed-income assets. They will retreat to safe-haven currencies, with dollar holdings rising appreciably and the euro benefiting as well.

But - where their mandates allow - they will also invest more in inflation-protected alternative assets.

On that theme, it is worth reading a new report that paints a clear and stark picture of the fundamentally changed investment challenges facing the world's biggest asset owners.

The 2022 edition of the Global Public Pensions report covers the top 100 global public pensions and the largest 50 sovereign funds with total assets of over US$27 trillion.

Most pension schemes had a remarkable year in 2021, riding the wave of rising markets to post stellar returns.

That era has come to a crashing halt in 2022 as interest rate hikes and the threat of stagflation loom large.

Asset owners don't expect that these issues will fade anytime soon. The survey shows that the global economic slowdown and higher inflation are their two main concerns over the next 12-24 months.

More than 40 per cent of respondents expect to increase allocations to real estate and infrastructure assets. They will seek to drive returns with more investment in private equity too.

This report also finds that GPFs are getting more active and moving away from liquid assets. A net 10 per cent of survey respondents anticipate decreasing their exposure to cash over the next one to two years.

For the first time, the survey of global public investors reveals a reallocation away from the renminbi. The biggest concern over China is geopolitical tensions - cited by over 70 per cent of respondents.

Around 15 per cent of survey participants said they will decrease their domestic holdings over the next two years, while close to 30 per cent plan to increase ownership of foreign assets - often with the help of external managers.

Climate change is one of the top two long-term concerns of more than half GPFs surveyed.

Many of them are trying to do something about it. Over 80 per cent of respondents plan to invest more in renewable industries, and 50 per cent plan to increase allocations to green bonds.

Integrating new technology and tools, security issues and costs are key technology issues for over 50% of GPFs. Better use of data lies at the heart of the problem. More than 80 per cent of funds state that building or improving internal data management systems are their main data priorities over the next two years.