Total assets managed by the world's largest pension funds fell for the first time since the start of the global financial crisis, no thanks to the challenging economic conditions last year.
The challenges, however, appear to have benefited Singapore's Central Provident Fund (CPF): it emerged from the shakedown of the world's top pension funds in a better position, rising from a 10th ranking in the world in 2014 to eighth last year.
The data comes from research conducted by international money-management newspaper, Pensions & Investments (PI), and global risk-management and advisory company, Willis Towers Watson (WTW).
They looked at the world's 300 largest pension funds, and found that the total assets managed by these funds fell by 3.4 per cent in 2015 to a sum of US$14.8 trillion overall.
PI/WTW said the fall was most likely due to last year's global market volatility, which was marked by low interest rates, weaker growth in emerging markets and high appreciation of the US dollar against other currencies.
Still, they added, despite this being the first drop in assets managed by the 300 largest pension funds since the beginning of the global financial crisis (GFC), cumulative asset growth since then has been almost 19 per cent.
Breaking down the numbers into regions, the researchers said North America recorded the highest five-year (2010-2015) compound growth rate, at 5.6 per cent.
Europe's annualised growth came in at 3.6 per cent, while the Asia-Pacific registered 1.3 per cent growth over the same period.
The highest growth in the top 20 funds globally, from 2010 to 2015, in US-dollar terms, was experienced by China (17.8 per cent). This was followed by the funds in Norway (9.5 per cent), South Korea (8.5 per cent) and Singapore (7.9 per cent).
In Singapore-dollar terms, Singapore funds experienced growth of 10 per cent over the period.
Of the world's top 20 pension funds, Japan's Government Pension Investment Fund remained at the top of the rankings - where it has been since 2002 - with assets under management (AUM) totalling almost US$1.2 trillion in 2015.
Singapore's CPF, with AUM totalling US$211.4 billion, accounted for a 1.4 per cent share of the total assets managed by the 300 funds covered in the research.
Naomi Denning, managing director for Investments for the Asia-Pacific at WTW, commented: "The continuing tides of asset rises and falls, combined with increasing liabilities, bears testament to how difficult it has become for funds to meet their respective missions.
"Large asset owners can have an advantage in this volatile, complex and ambiguous investment world by improving organisational effectiveness to enhance decision-making. It has become clear that good investment governance is the key determinant in producing the competitive edge necessary to transform portfolios and succeed in the ever-evolving mission of trying to pay benefits securely, affordably and in full."
PI/WTW's research found that the world's top 300 pension funds represented about 42 per cent of global pension assets as of March 31, 2016.
North America remains the region with the largest share of AUM, accounting for 43.6 per cent of all assets in the research.
Europe was the second largest region with 27.6 per cent, followed by the Asia-Pacific with 25.1 per cent.
The United States remains the country with the largest share of pension fund assets, accounting for around 38 per cent. Japan has the second-largest market share at around 12 per cent, and the Netherlands is in third place with over 6 per cent.
The research showed that 27 new funds entered the ranking during the past five years; on a net basis, the US contributed the most new funds (10), followed by the United Kingdom, South Korea and Australia. Mexico had the largest net loss of funds from the ranking (four), followed by Switzerland, Germany and Japan.
Ms Denning said: "There has been a fair amount of movement in the ranking in the past five years with winners likely being determined by having fully diversified portfolios that performed well in times of stress, and a focus on total - rather than relative - returns.
"Another differentiator of leader funds is their ability to innovate or be an early adopter - critical in such a persistently low-growth environment."
Sovereign and public-sector pension funds accounted for the bulk of total assets covered in the research; they hold a 67.7 per cent share, with 142 funds in the top 300.
Of these, the 115 public-sector funds in the research had assets of almost US$6 trillion in 2015 and accounted for 39 per cent of the total assets. The 27 sovereign pension funds accounted for 28 per cent of assets, totalling US$4.2 trillion.
Private-sector industry funds (58) and corporate funds (100) accounted for 14 per cent and 19 per cent, respectively.
Ms Denning said: "The investment landscape is changing rapidly as more asset owners address their relatively weak investment governance position to become more effective in their investment process and practices. Twenty years ago, world-class asset owners were largely run through external delegation to outside firms. Now we're seeing much stronger capabilities among the biggest asset owners, and best investment practice is usually associated with getting a good balance between internal resources and external delegations."
PI/WTW's research also showed that only hybrid-plan assets grew last year - by almost 14 per cent. All other fund types declined: defined benefit (DB) plans' assets fell by almost 5 per cent, defined contribution (DC) assets fell by over 2 per cent, and reserve funds, by 0.3 per cent.
DB plans are pension plans in which the employer promises the employee a set payout upon the employee's retirement. DC plans are plans in which the employer, employee or both make contributions on a regular basis, such as Singapore's CPF. Reserve funds are monies or assets set aside in a fund for future needs.
The top 20 funds, on average, invested 40.8 per cent of their assets in equities, 39.0 per cent in fixed income securities and 20.3 per cent in alternatives and cash.
North American funds have predominantly invested in equities; Asia-Pacific funds prefer fixed income.
This article was first published on Sep 07, 2016.
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