US-based pension funds are the largest in the world with around $35 trillion in assets, according to a study just released by consultants Willis Towers Watson Plc. That’s nearly 10 times the size of the second-place UK at $3.86 trillion and Japan’s $3.7 trillion, according to the report. Canada, Australia, the Netherlands and Switzerland round out the world’s top seven for a combined total of $52 trillion.
Over the past 20 years, these pension funds have changed their asset mix. The role of equities has declined, falling to 45% of holdings last year from more than 60% in 2001, the study says. Alternative assets, including real estate, have grown to represent around a fifth of investments, compared to 5% twenty years ago.
But these American investors remain stubbornly dependent on domestic securities. More than 60% of their equity holdings are in their home market, a figure that has remained fairly constant over the past decade. In contrast, average national exposure to the seven major pension markets is below 38% and has almost halved since 2001.
In fixed income, the domestic preference for US pension plan administrators is even more pronounced. About 87% of the bonds they hold are domestic issues, compared to an average of around 70% for the seven largest pension fund groups combined.
In recent years, the focus on US equities has been a winning strategy. The S&P 500 generated a total return, including dividends reinvested, of more than 18% last year, double the payout available from an MSCI index of global stocks excluding US equities. But so far this year, returns on US assets have lagged those of their foreign counterparts.
With the Federal Reserve likely to be more proactive than its fellow central bankers in tightening monetary conditions in an effort to rein in inflation, non-US markets may continue to suffer less damage. US pension funds should consider following the global trend by broadening their asset allocation to include more foreign securities.
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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He was previously the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable”.