As the new year begins, institutional investment worldwide seems to be on the right track.
Most developed countries, and many developing countries - partly at the prompting of the Organization for Economic Cooperation and Development - are examining the remaining political restrictions imposed on the capital markets with an eye toward liberalization.
If the trend continues, by the year 2000 institutional investors in the developed countries may well take similar, although certainly not identical, forms, and may be operating under similar regulatory environments with minimal restrictions.
Such a development would be beneficial not only to all investors, but also to economic development throughout the world, as capital was allocated more efficiently, stimulating growth.
Looking at developments around the world, the strong stock market in a mostly benign environment was the big story in the United States. The strong market was driven in part by increased investment in equity mutual funds by individuals through their defined contribution pension plans. And the strong market in turn encouraged the increased equity commitment.
On the political front, the developments were mildly positive, with Congress finally passing the Pension Simplification Act, which should at least slow the termination of pension plans, and may actually encourage the start of new ones.
British pension funds in 1996 were mostly digesting the 1995 Pensions Act, and have begun developing statements of investment principles, similar to the investment policy statements adopted by most U.S. funds after the passage of ERISA.
The new statements of investment principles, combined with minimum funding rules, already appear to be changing the average asset allocation of British pension funds, slightly reducing equities while boosting fixed income, producing asset allocation figures closer to those of U.S. funds.
At the same time, British plan sponsors are showing increased interest in defined contribution plans.
So, too, are Swiss companies, which also now must develop clearly defined investment strategies for their defined benefit plans. While this may make them more conservative initially, it is expected to eventually lead to greater equity commitments and greater exposure to international equities.
Elsewhere in Europe there was further discussion on ending limitations on the ability of pension funds to invest outside their home markets.
Dutch authorities are trying to encourage Dutch pension funds to increase their stock allocations. However, draft funding rules seem to be in conflict with that aim, and, if adopted in their present form, might make Dutch pension funds less willing to increase their equity exposure.
In France and Germany there have been further halting steps toward funded pension systems, probably defined contribution, with the French considered more likely, near term, to make significant progress.
There has been progress also in countries such as Japan, Russia, China, Hong Kong, Singapore, Malaysia and South Africa in either the establishment or liberalization of pension fund law. In such countries the growth of pension funds will help the growth of the capital markets.
In Australia there was a slight setback as the government, to gain revenue, severely limited the ability of upper-middle and high-income executives to save and invest for retirement in a tax-favored way, a move likely to slow savings growth.
Overall, though, 1997 starts off on a positive note.
