The worlds largest 300 pension funds grew 11.5% last year, with assets topping $10 trillion for the first time while keeping pace with the 2005 growth, according to an annual survey conducted by Pensions & Investments and Watson Wyatt Worldwide.
Benign global markets helped to sustain returns in 2006, and further portfolio diversification added stability in the drive for alpha, Watson Wyatt consultants said. A weak dollar stunted growth of U.S. pension funds when compared with counterparts in regions with stronger currencies, helping to push several U.S. funds out of the rankings in 2006.
Indeed, the U.S. share of pension assets in the top 300 continued to erode, declining to 43% of the $10.4 trillion total in 2006, compared with 45% in 2005 and 63% five years earlier. (Data for U.S. funds are as of Sept. 30, 2006; Australian funds, June 30, 2006; Japan as of March 31, 2007; and Dec. 31, 2006, for the other funds.)
The top three funds held their rankings from the previous years ranking, led by the Government Pension Investment Fund, Tokyo, which alone controlled 9% of the total assets with $936 billion. But Japans share of the total pension assets in the top 300 also declined to 15% from 18% partly because of a fall in the yen relative to other currencies.
Norways Government Pension Fund, Oslo, was second with $286 billion, while Stichting Pensioenfonds ABP, Heerlen, the Netherlands, came in third with $274 billion.
The largest pension fund in the U.S. the California Public Employees Retirement System, Sacramento inched up to fourth place from fifth place, swapping spots with Koreas National Pension Corp., Seoul. CalPERS had $218.2 billion while Koreas National Pension fund had $203 billion.
The Japanese and Norwegian funds were established by each countrys government within the past six years to help meet demands of an aging society. Japans fund was published in the survey for the first time in 2003; the Norwegian fund made its debut last year. In the current survey, 22 of the top 300 funds were sovereign pension funds holding $2.36 trillion or 22.6%, of the total.
These sovereign pension funds are growing fast and becoming increasingly influential, said Roger Urwin, global head of investment consulting at Watson Wyatt Worldwide, Reigate, England. Theyre the poster child of the institutional funds world.
Three sovereign funds the Future Fund, Melbourne, Australia; the New Zealand Superannuation Fund, Auckland; and the Government Pension Fund, Bangkok, Thailand were added for the first time to this years list.
One common feature across all flagship funds in Asia is that they have been looking at practices across the world and trying to develop their funds, said Naomi Denning, Hong Kong-based head of investment consulting for WWWs Asia-Pacific region. All have built teams looking at global best practices, developing strategies to target better returns and a better understanding of the importance of diversification.
Many are eager to move into alternatives, so as not to have their funds so focused on the equity risk premium, Ms. Denning said. Theyre looking at real estate, hedge funds and private equity. Their investment strategies are evolving quite rapidly.
The top 300 pension funds represent about 40% of the total global pensions market, with the top 30 funds controlling 20% of assets, according to separate data provided by Watson Wyatt.
The market environment that nurtured the funds in 2006 has proven more volatile in 2007. In the aftermath, pension funds globally are in the middle of a phase of extreme condition investing, said Mr. Urwin.
Most of the good work for the year went just like that. Pension funds were quite surprised by how it has unraveled, he said. In three months time, when things (have) settled, I think the view of risk will have changed somewhat at a fundamental level.
Quantitative managers suffered a major blow in August as many factors used in their investment strategies faltered under market stress. This will make it clearer (to investors) that no single style will dominate in the next few years, Mr. Urwin said.
In what appears to be a higher level of alignment between investment strategies among the top 20 pension funds in Europe and North America, both regions showed a similar rate of growth for the first time in five years with 21.5% and 18.4%, respectively, the survey showed.
At the margin, quite a number are reducing equities and either increasing bonds or alternatives as a defensive measure, Mr. Urwin said. But theres still a strong formula (among all pension funds globally) to allocate an average of around 60% in equities, 33% in bonds and 7% in alternatives.
Indicative of this global average in asset allocation is the Norwegian Government Pension Fund-Global, which is the portion of the state fund that invests in overseas markets. In June, the fund won government approval to increase its equities holding to 60% and reduce bonds to 40%. But officials are considering adding alternatives, including real estate, that may further reduce the bond allocation.
Liability-driven investing, which took off in Europe several years ago, is now gripping the U.S. corporate pension market, according to Carl Hess, practice director of Watson Wyatt Investment Consulting in North America.
We are seeing signs that (the investment practices of) corporate and public funds are diverging, said Mr. Hess, who is based in New York. Theres a clear trend of de-risking by market players. LDI has moved into the mainstream among corporate pension funds. This hasnt happened among public funds, nor do we see a strong trend for them to move into LDI.
For example, General Motors Corp. announced a 20% shift in defined benefit pension assets about $20 billion to global fixed income from global equity in an effort to protect a $17 billion pension surplus, according to the companys 2006 annual report.
Both U.S. public and corporate pension funds made good strides in diversification in 2006, Mr. Hess said. In an environment of increased volatility, that trend is set to continue, he added.
But if you think about where people need to be, the answer is not that they simply need to be more diversified it also has to do with risk budgeting and a tightening of (investment) discipline, Mr. Hess said.
Australia in forefront
Among major pension markets, Australia led the way in terms of asset growth. Australian pension assets in the top 300 grew 40% in U.S. dollar terms to US$118.4 billion and about 30% in local currency term in 2006. A mandatory defined contribution system helped to boost inflows, while investment decisions that are among the most sophisticated in the world also contributed to excess returns in Australian funds, according to Ms. Denning.
In general, European pension funds grew at a slower pace in local currency terms but tallied hefty gains in dollar terms. The U.K. grew by an average of 7.8% in local currency terms and 22.5% in dollar terms. U.K. pension assets in the top 300 totaled $741.5 billion. The Netherlands increased an average of 6.6% in local currency terms but 18.6% in dollar terms, racking up $640.9 billion in total pension assets in the top 300. Swedens pension funds in the top 300 swelled by 16.5% in local currency terms and 35% in dollar terms.
Denmark grew by 2.2% in terms of Danish kroner but 13.8% in U.S. dollar terms. Four new Danish pension funds the most added by any individual country made the top 300. They are: the $36.1 billion PFA Pension, Copenhagen; the $10.8 billion PensionDanmark, Copenhagen; the $9.6 billion Laegernes Pensionskasse, Copenhagen; and the $8.7 billion Pensionskassen for Sygeplejersker, Hellerup. Danish pension funds in the top 300 had $174.7 billion in assets under management.
Canadian pension funds in the top 300 gained an average of 12.7% in U.S. dollar terms, totaling US$572 billion in assets. The US$100.7 billion Canada Pension Plan, Ottawa, broke into the ranks of the top 20 pension funds at No. 18, while the Ontario Teachers Pension Plan, Toronto, moved to 13th place from 16th place the previous year.
In comparison, U.S. pension assets in the top 300 grew 6%. The U.S. saw 13 funds drop out of the P&I/WW 300, in large part because of the dollars 11.4% drop against the euro. Among the names that fell off the list are Xerox Corp., Viacom Inc. and PepsiCo Inc.
The U.S. is still the biggest player, but its not as far ahead of everyone else anymore, Mr. Urwin said.