Assets of the
world's largest 300 retirement funds increased by 9.8% in 2012, eclipsing the
1.9% growth rate from the previous year, according to an annual survey
conducted by Pensions & Investments and Towers Watson & Co.
“It was a
year in which taking risk paid off,” said Carl Hess, global head of investments
at Towers Watson, New York. “Global (developed markets) equities were up about
16%, and bonds also performed well, if not necessarily spectacularly. Returns
in 2012 were very nice no matter where you were. What's not to love?”
Although
investors faced a series of economic threats during the year, they didn't
materialize. For example, equity markets continued to climb despite fears
surrounding a possible collapse of the euro and the impact of the fiscal cliff
in the U.S. Out of 12 funds in the top 20 that published annual reports online,
eight had stressed volatility and uncertainty in global markets. Low
interest-rate levels were also often cited as a major source of concern.
“As we are
entering (the second half of) 2013, those problems have not really gone away,”
Mr. Hess added. “It does leave us a little more precariously positioned.”
Equity was
the best-performing asset class in 2012. The Russell 3000 index returned 16.4%.
The MSCI All World ex-U.S. index grew by 16.5% and the MSCI Emerging Markets
index added 18.2% for the year.
In fixed
income, the Barclays Capital Global Aggregate Bond index increased by 4.3%
during the same period.
“2012 was
pretty good for growth, and it was mostly down to equity, which was the single
biggest risk taken by pension funds,” Mr. Hess said.
For the first
time, the survey split the funds according to defined benefit, defined
contribution, reserve funds and hybrid plans. DB plans, which accounted for
68.5% of the total worldwide assets, grew at a rate of 7.6% compared to the
12.4% pace for DC in the year ended Dec. 31, 2012. Overall, the share of DC
assets was estimated at about 20.2% of the total, while reserve funds accounted
for 10.6%. The remainder of the assets was in hybrid funds.
“It's hard to
find an economy where there are new DB plans being created,” Mr. Hess said. “If
we look at Asia, for instance, with the exception of Japan, most have avoided
DB. ... It will be awhile before DC reaches the maturity level of DB, but the
pendulum has definitely tilted in that direction.”
Latin America
has one of the highest DC growth rates, particularly in Mexico, where
retirement assets grew by about 11.1% in local currency terms and about 7.4% in
U.S. dollar terms on an annualized basis in the past five years. Spurring the
rise in DC assets was a wave of recent social security reforms throughout the
continent, many of which are loosely based on the Chilean model in introducing
personal retirement accounts, Mr. Hess said.
“Like
Australia, these reforms have resulted in large new (DC) asset inflow,” Mr.
Hess added, referring to the 12.8% annualized growth in DC for Australia over
the past five years in U.S.-dollar terms. “These (DC) funds will likely grow
rather large rather quickly.”
The U.S.
share of the worldwide assets also grew slightly in 2012 to 35% in 2012
compared to 34% last year, partly due to double-digit returns in equities
combined with the strengthening dollar vs. the euro and yen. In addition, new
asset inflows bolstered many public funds that were “shoring up their finances
in 2012,” Mr. Hess said.
“In the long
term, however, we're not likely to see new U.S. corporate funds, and therefore,
the long-term trend is still pointing downward in terms of U.S. significance
rather than upward,” Mr. Hess said.
In the past
five years, aggregate assets held by North American funds in the top 300
decreased by an annualized 0.5% while the total worldwide assets rose by an
annualized 5.6%. Assets held by Asia-Pacific and European funds grew by an
annualized 6.7% and 5.5%, respectively. Funds from the “other” category —
including many emerging markets such as China, Chile and Mexico — grew at the
fastest annualized rate of 10.9% during the same period.
“The
direction of the U.S. pension system is comparatively more mature, with fewer
and fewer funds at the top” compared to other regions, according to Mr. Hess.
The top three
funds remained the same in 2012. The $1.29 trillion Government Pension
Investment Fund, Tokyo, continued to top the list at nearly twice the size of
the runner up — Norway's $712.6 billion Government Pension Fund Global, Oslo.
In third was the $372.9 billion Stichting Pensioenfonds ABP, Heerlen,
Netherlands.
Sovereign
pension funds such as Japan's and Norway's represent 28.4% of the worldwide
assets, with 26 funds controlling about $4 trillion, according to the survey.
Aggregate
assets of the top 20 grew by 8.6%, lagging the overall increase of top 300
funds. However, the top 20 funds still accounted for 39% — or $5.5 trillion —
of the total worldwide assets of the top 300 funds. Historically, the top 20
grew at a faster pace than the overall top 300, averaging an annualized 4.8%
compared to 3.2% over the past five years, respectively. The U.S. share in the
top 20 has dropped to 20.8% in 2012 from 36% five years ago.
On an
arithmetic average basis, the top 20 funds invested about 40% in fixed income
and another 40% in equities in 2012. The remainder was allocated to
alternatives and cash.
In addition
to traditional equities and bonds, returns from alternative assets also boosted
assets at the top 300 funds. The HFRI Fund Weighted Composite index grew by
6.16% in 2012, and the Cambridge Associates LLC U.S. Private Equity index
increased by 13.8%. Healthy returns were also recorded for real estate, with
the NCREIF Property index rising by 10.5%.
“With assets
having climbed higher in 2012, now there's further for them to fall,” Mr. Hess
said.
For global
market performances to continue through 2013, they must be supported by
sustained economic growth.
“In China,
recent data suggests growth is slowing. In the U.S., how much of the recent
rally is due to real growth and how much of that is fueled by cheap money? In
Europe, the immediate problems of the euro still have yet to be resolved,” Mr.
Hess said. “It's difficult at the moment to see where strong growth is going to
come from.”
Data Editor
Timothy Pollard contributed to this story.
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