Pension funds must diversify to generate returns

The Covid-19 pandemic has highlighted why pension funds need to diversify across asset classes and geographies to continue earning good returns in a low interest rate and high inflation environment, experts said at the Arab Pensions Conference 2021.

Markets and equities have performed strongly since the 2008 financial crisis and institutional investors received healthy returns, while pension funds were able to meet their obligations, experts said, during a panel session on the second day of the Arab Pensions Conference 2021.

The session focused on how funds could continue generating positive returns in the long term. “At Jordan’s Social Security

Investment Fund, portfolio diversification reduced the negative impact of the pandemic,” said Kholoud Saqqaf, chief executive of SSIF.

“We have witnessed a growth in our investment returns. Our assets grew to 12.1 billion Jordanian dinars ($17bn) as of the end of September from 11.2bn dinars at the end of 2020.

“Our allocations were primarily in government bonds with fixed returns, blue-chip banks and blue-chip industry stocks.”

Although the SSIF’s investments are all local, it decided to diversify outside Jordan after the pandemic, Ms Saqqaf said.

“We steered our investments towards agriculture, infrastructure, water and energy sectors.”

The combined retirement savings gap is expected to reach $400 trillion by 2050 between eight major economies – Canada, Australia, the Netherlands, Japan, India, China, the UK and the US, according to a 2019 report by the World Economic Forum.

Meanwhile, there are longterm concerns about the 60:40 allocation that pension funds typically give to equities and bonds, according to Karim Chedid, head of investment strategy for iShares Emea at BlackRock.

Fixed-income returns are extremely low, while volatility is starting to pick up slowly in equities, he said.

“As we look at long-term strategic allocation, diversifying is important. Since the GFC, stocks and bonds have been strongly co-related. Is that enough to diversify or look at alternative schemes like private equity, infrastructure and real estate?” Mr Chedid asked.

Pension funds should consider investing in emerging market debt and sustainability, Mr Chedid said.

Fund managers also need to hedge their portfolios against inflation by increasing exposure to commodities such as gold, gold producers and diversifying into cyclicals and defensives, he added.

“For some pension funds, there are regulatory constraints on diversification beyond domestic territories,” said Alistair Byrne, head of retirement strategy and UK institutional distribution at State Street Global Adviser.

“There is a strong case to lobby against it and invest in global equities, emerging market equities, fixed-income and emerging market debt.”

Investors need to have the right portfolio to hedge against risks that might not have been there before, according to Abdulatif Alseif, co-founder and managing director of Sabeen Investment.

“Consider investments in alternatives or other complex instruments. Passive strategies worked very well over the past decade and provided investors good returns at reasonable costs. With increased market volatility, will active management be back again?”

Investors today also must be more efficient and consider what to do with investment execution costs and how to renegotiate fund manager fees given the low interest rate environment, Mr Alseif said.