The 2022 Mercer Asset Allocation Survey report revealed how pension fund investors are responding to complications in the global capital markets.
The report highlighted that the overall asset allocation has remained steady over the last year.
However, in some jurisdictions, there were increasing allocations to alternative strategies and equities, including foreign equities, as investors diversify outside their home markets
The interest in sustainable investing is also mounting, with environmental, social, and governance (ESG) issues gaining the attention of many investors and regulators.
Another prominent theme is reshaping monetary policies as inflation balloons past central bank targets.
Policymakers are grappling with the consequences of bloated balance sheets, the potential economic impact of higher interest rates, and disrupted global supply chains.
The report highlighted actions investors can take in the current economic environment.
- Explore alternative investments like private equity, private debt, real estate, and infrastructure.
- A larger allocation to China’s onshore market could benefit many investors.
- Protect against inflation by considering appropriate changes.
- Invest sustainably by developing portfolio climate-transition plans.
- Challenge your home bias by considering additional diversification for your portfolio.
The report revealed that allocations to growth assets increased 6% year-on-year in South Africa.
Local managers adopted a more pro-risk stance as investors looked toward a rebound in business activity and more normal conditions despite the emergence of new COVID-19 variants.
Increased equity allocations were primarily funded by a reduction in cash allocations, with domestic equities being favoured over international equities.
The higher local allocation was because of more attractive valuations within the South African market.
Although international assets saw a 2.5% reduction, investors continue to use their permitted allocations to non-African investments.
International assets now represent around 28.5% of total allocations at the reporting date.
The allocations to offshore assets are expected to increase following the National Treasury’s decision in February 2022 to allow retirement funds to invest up to 45% of their portfolios globally.
Previously, pension funds typically invested up to the 30% non-African limit. Due to limited opportunities, they did not significantly use the 10% allocation to Africa investments.
The use of alternative asset classes is limited, as liquidity will remain a constraint in a mainly defined contribution (DC) DC pension fund market.
The charts below show the asset allocation by pension funds in South Africa.