China pension fund asset growth outpaces top 20 global funds in 5 years

Photographer: Nelson Ching/Bloomberg

China tops the list of largest pension funds witnessing the highest annualized growth in assets in the last five years — 2011 to 2016 – even as global pension funds step up investment strategies and compete with heavyweight private equity firms and investment managers for assets,  according to a recent report.

The country, which is considered world’s third largest investor after US and Japan, recorded a growth of 20.6 per cent in pension fund assets in US dollar terms during the past five years, the highest growth in the top 20 funds in the period, followed by Norway, South Korea and US, based on a report from Willis Towers Watson Pensions & Investments 300 analysis.

Among the sovereign pension funds, China’s National Social Security also figures among the top 10 in terms of assets at $348.6 billion at the end of 2016. The biggest is Japan’s Government Pension Investment which has assets worth $1.23 trillion followed by Norway’s Government Pension Fund at over $893 billion.

Norway’s pension funds — sovereign and public — grew 9.2 per cent during the period while South Korea’s grew 8 per cent. Others in the list include Singapore which grew 7.3 per cent, Canada which recorded a growth of 6 per cent and Malaysia 1.5 per cent. Japan and Denmark went negative.

The growth rates were in fact higher in local currency terms due to the strong appreciation of the US dollar against all major currencies. These top 20 funds which were taken into consideration collectively hold assets worth $6.3 trillion at end of 2016, growing from $5.05 trillion since 2011.

The world’s top 300 pension funds, that have been studies in the report, together now represent 43.2 per cent of global pension assets, up from 42.5 per cent in 2015.

 

Asia Pacific pension funds return to growth

The largest pension funds in Asia Pacific witnessed a 7 per cent year-on-year growth in assets to $3.7 trillion lifting the overall ranking of the region’s sovereign and public sector pension funds by asset size, according to the report.

In a return to growth following a 3.4 per cent decline in 2015, based on asset size, Asia Pacific pension funds outperformed those of the world’s largest pension funds overall. The latter increased in value by 6.1 per cent in 2016, representing a total of $15.7 trillion.

Global pension funds have seen cumulative growth in assets since 2011 of 23.4 per cent while Asian sovereign and public sector pension funds in the research, China’s National Social Security Fund retained its previous position in the ranking at position 6.

 

In the region, India’s Employees’ Provident Fund moved up to position 21 (from 27), Taiwan’s Labor Pension Fund to position 35 (from 46), Taiwan’s Labor Insurance Fund to position 174 (from 193) and Vietnam’s Social Insurance Fund to position 185 (from 204). The research reveals that each of these funds had stronger asset growth – more than 10% – than their peers from the previous year’s figure.

Exposure to alternatives inching up but long way to go

Looking at the weighted average allocations by region, Asia-Pacific funds have largely invested in fixed income at 54.2 per cent while North American funds have predominantly invested in equities at 46.5 per cent. Based on the report, among the top 20 pension funds globally, Asia Pacific funds allocated a marginal 6.6 per cent for alternative assets.

“But in a highly competitive and fast-changing world, Asian funds with a long horizon should evaluate their equity portfolio characteristics to increase the chance of out-performance on a sustainable basis to meet their return objectives,” said Jayne Bok, Head of Investments for Asia at Willis Towers Watson.

Factors that have to be considered include the extent of home bias, the degree of a portfolio resembling a market index, the constraint imposed, the structure of managers, and costs and implementation routes, she added.

 

Nevertheless, Asia Pacific pension funds have been increasingly looking at alternatives for investment. China’s National Social Security Fund has been seen increasingly allocate funds for alternatives which is estimated to be at over 20 per cent of its total assets.

Similarly, Japan Pension Investment Fund (JPIF) in its annual report for 2016 has said it will diversify the investment portfolio to include alternative assets. It this regard, GPIF developed an organization and system in preparation for inviting applications for executing multi-manager strategies concerning alternative assets (infrastructure, private equity and real estate).

“The inclusion of alternative assets, which have different risk-return profiles compared with traditional investment assets such as listed equities and bonds, is expected to improve efficiency of the GPIF’s investment portfolio through diversification,” the annual report said.

Among others, Singapore and Malaysian pension funds are consistently increasing exposure to private equity, real estate and others by way of direct or co-investments.

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