Global equities attract more pension investments

It is expected to continue as larger pension plans diversify their equity strategies.

Pension funds are increasingly shifting towards global equity mandates as part of their investment strategies, reflecting a growing interest in international equities. 

According to Lesley-Ann Morgan, Global head of Pensions and Retirement, and Rachel Munnery, Product Strategy director at Schroders, sector flow data revealed a significant trend of positive net sales in global large-cap equities, contrasting with the consistent net outflows from regional equity mandates.

Corporate defined benefit (DB) plans, which are gradually being phased out in many countries, have generally seen a reduction in equity exposure. 

This shift is driven by the need to match pension liabilities more closely with assets, leading many DB plans to favour fixed-income investments. However, the trend is not universal. 

Countries like Canada and Japan have maintained equity allocations, and in some cases, pension plans are turning to buyout strategies, transferring pension obligations to insurers, which further reduces the size of the DB market and results in negative net flows across asset classes.

In contrast, corporate-defined contribution (DC) plans, particularly in Australia and the US, are following divergent asset allocation paths. 

Australia has heavily invested in alternative assets, whilst the US 401(k) market remains more traditional, with a strong emphasis on low fees. 

Despite a shift towards individual retirement accounts (IRAs) as individuals retire, target date funds continue to dominate the US DC market due to their automatic asset allocation adjustment based on retirement dates.

Recent trends in Australia show positive net flows into both fixed income and equities, with global equities gaining ground.

Pension funds are also re-evaluating their strategies in light of concerns around deglobalization, geopolitical risks, and climate action. 

These factors have prompted some to question whether smaller regional or country mandates limit flexibility in future decision-making. Global mandates, by contrast, offer more room for tactical asset allocation, allowing managers to adapt to changing market conditions.

The move towards global equity mandates is expected to continue as larger pension plans diversify their equity strategies. Whilst fully shifting from regional to global approaches may take time, pension funds that have yet to reconsider the role of international equities might find it beneficial to do so.