Funds fail to repeat success in 2018

The world's largest retirement funds saw their assets dip 0.4% in 2018, to $18 trillion.

That compares with an increase of 15.1% the prior year, according to the latest survey by Pensions & Investments and the Thinking Ahead Institute of the world's 300 largest retirement plans.

For the 20 largest retirement funds, assets fell 1.6% to $7.3 trillion, vs. a nearly 17% rise in 2017.

Bob Collie, London-based head of research for the Thinking Ahead Group, the institute's executive team, said the drop reflected weak short-term returns.

Global equity markets, as measured by the MSCI All Country World index, produced a 9.42% loss in 2018.

"The (financial) market wasn't as strong in 2018, but investors on the whole would still expect total AUM to be increasing over time" as participants' savings are growing, Mr. Collie said.

"Obviously defined benefit is peaking at some point. That has probably happened in North America but is yet to happen in the U.K. and other markets around the world. There will be a point when DB will go away but that (gap) will more than be made up for by DC increases."

"We have growing retirement savings' markets underlying the overall picture from year to year,'' even if the value of assets fluctuates, he added.

Mr. Collie said the 300 largest asset owners have a lot at stake when it comes to geopolitical events such as trade wars. The current dispute between U.S. and China, for example, could reverse the 20-year trend toward greater integration of the two countries' markets and economies, he said.

In 2018, the top 300 funds accounted for about 44.9% of total global retirement assets as of Dec. 31, up from 43.6% at year-end 2017.

Mr. Collie said there are still many plans that don't have the scale to become a top-tier organization. Retirement plans have to think about achieving that scale, which could include merging with other asset owners, he said.

"The pendulum is swinging to fewer organizations," partly because of technological advances and partly because of the strong focus on costs, he added.

Due to having to compete for assets with large sovereign wealth funds, "it's getting expensive for (plans) to build a leading organization," he said.

Within the World 300 ranking, the 20 largest funds accounted for 40.7% of the total assets. Among that group, two U.S. funds reported the most significant asset increases.

The California Public Employees' Retirement System, Sacramento, recorded the largest asset increase among the top 20, rising 11.9% to $376.9 billion, moving up a notch to rank sixth. The Federal Retirement Thrift Investment Board, Washington, rose 8.9% to $578.8 billion. It swapped places with South Korea's $573.3 billion National Pension Service, Jeonju, to rank third after the $1.37 trillion Government Pension Investment Fund, Tokyo, and the $982.3 billion Government Pension Fund Global, Oslo.

The two largest asset declines in the top 20 were China's National Social Security, Beijing, which saw its assets fall 18.7% to $371.6 billion and Government Pension Fund Global, which lost 7.6% in assets.

A 6.38% asset decline in dollar terms to $125.4 billion cost the Government Employees Pension Fund, Pretoria, South Africa, a place in the top 20. ATP, Hilleroed, Denmark, which replaced the GEPF, saw its assets hold steady around $129 billion.

All data in the survey are converted into U.S. dollars. The dollar appreciated against all other major currencies over the year: 3.6% vs. the euro; 5.1% vs. the pound sterling; 4.9% vs. the Canadian dollar; 4.6% vs. the Australian dollar; and 0.8% against the yen.

Overall asset allocation of the top 20 funds changed slightly during the year. On a simple average calculation, equities remained the highest exposure for these funds at 40.6%, down from 42.1% in the 2018 study. Bond exposure was 37.4%, up from 36.9%, and the remaining 22% was invested in alternatives and cash, compared with 21% in the prior survey.

On a weighted average basis, the equity allocation of the top 20 funds was 44.5%, down from 46.3% in the prior year's survey; bond exposure was up to 37.2% from 36.1% last year; and alternatives and cash took the remaining 18.3% of allocations, up from 17.6%.

Asset allocation makeup today still is influenced heavily by cultural norms rather than pure economic rationale, Mr. Collie said.

"If we look at Asian markets, (Asian) savings accounts naturally sit primarily in bonds but there has been the gradual move to (a) risk-taking model and away from a cautious position," he said.

Indeed, bond portfolios of Asian funds were the most significant among Top 20 funds, at 53.8%, followed by European funds and North American funds, which invested 36.2% and 19.4% of their portfolios in bonds, respectively.

There is a strong culture of equities in the U.S., Mr. Collie noted.

Among the Top 20, North American funds invested 46.7% of their assets in equities compared to their European and Asian peers, whose allocations to stocks were 49.1% and 39.2%, respectively.

"U.S. pension plans were very much more growth-oriented, (historically) competing with one another, looking to maximize returns," he said. "In an absolute sense, you could argue this got out of hand, there was too much risk being taken." With the stronger focus now on liabilities, "that's been pulling funds back to the center," he added.

Noting increasing demand for private markets allocations, Mr. Collie said: "private markets are a growing part of the (existing) opportunity set," he said. The top 20 largest North American funds invested 33.9% of their portfolios in alternatives and cash. This compares with 14.7% of top European funds' portfolios and 7% of top Asian funds' assets.

By region, North American funds accounted for the largest share among the World 300 funds, 45.2% of all assets — up from 42.3% — and $8.14 trillion. The region's annualized growth for the five years through year-end 2018 was 5.8%.

Asia-Pacific funds took a 26.2% share of total assets, down from 27.3% in 2017. The region's funds had $4.72 trillion in assets, and an annualized five-year growth of 5.2%.

Europe's assets totaled just less than $4.5 trillion, with an annualized five-year growth of 0.5% and accounting for 24.9% of the total. That compared with a 26.5% share at year-end 2017.

Defined benefit funds still are a force, accounting for 64.7% of total assets, essentially flat from last year. Defined contribution assets accounted for 23.9% of the total, up from 22.7% last year with assets growing 5.1% in 2018.

Mr. Collie said: "Expanding beyond the U.S. and the U.K., there is a lot of room for DC to potentially become a bigger story as pension systems are being instituted in the emerging world."

"These countries have an opportunity to design their pension system. In the U.K. and the U.S., the DC system has emerged from a need by happenstance rather than a deliberate design. (Emerging countries) have the choice for how they want the system to be," Mr. Collie said.

Assets in reserve funds — those set aside by national governments to guarantee retirement payments in the future — dropped 9.5% from the previous year. They accounted for 10.6% of total assets in 2018, compared with 11.8% in 2017. And assets in hybrid funds, those that incorporate components of both DB and DC programs, decreased 4.6%, but still accounted for 0.8% of total assets — steady over the year.