U.S. pension funds' emerging markets assets rose about 56% to $128.5 billion in the year ended Sept. 30, according to the latest Pensions & Investments survey of the nation's largest retirement funds.
In the year ended Sept. 30, emerging markets equity assets reported by defined benefit plans in the P&I Top 200 rose to $115.1 billion, up 56.4% from $73.6 billion a year before. Emerging markets bond assets also rose 54% in the same period, to $13.4 billion.
Strong investment returns in both asset classes and changing risk dynamics of these rapidly growing countries fueled the rapid rise, experts said. Further growth is expected.
“People are recognizing the growth story and general financial health of the emerging markets relative to the developed markets in general,” said Michael P. Manning, president of investment consultant NEPC LLC in Cambridge, Mass. “There's probably a long wave of opportunity.”
Strong returns contributed to emerging markets asset growth. The MSCI Emerging Markets index rose 20.4% in the year ended Sept. 30, while the J.P. Morgan Emerging Markets Bond index rose 15.9% in the same period. Taking those returns into account, equity assets invested by the pension plans in the Top 200 still grew about 30% while emerging market fixed income assets rose around 33%.
The outperformance of emerging markets equity over developed markets “is remarkable,” said Scott P. Leiberton, managing director-equities at Principal Global Investors in Des Moines, Iowa. “It's been a huge outperformer for the past decade.”
The MSCI Emerging Markets index returned an annualized 10.8% in the 10 years ended Sept. 30 vs. -0.4% for the S&P 500 index and 0.2% for the MSCI Europe, Australasia and Far East index. Emerging markets bonds also outperformed over the past decade, with the J.P. Morgan Emerging Markets Bond index rising an annualized 10.5% vs. 6.4% for the Barclays Capital U.S. Aggregate Bond index and 7.3% for the Barclays Capital Global Aggregate Bond index (hedged).
Another contributor to the spike in emerging markets assets was new allocations from pension funds. As of Sept. 30, 91 of the defined benefit plans in the top 200 reported equity allocations and 25 had bond allocations to emerging markets, up from 79 equity and 20 bond allocations a year earlier.
The California Public Employees' Retirement System, Sacramento, held the most emerging markets equity assets in the survey at $11.01 billion. That was up just 2.6% from the $10.73 billion CalPERS had a year earlier, when it also held the No. 1 spot.