Johannesburg: Mercer’s Asset Allocation Insights 2022 report released today showed that South African pension funds invest 61% of their portfolios in equities, which is one of the highest equity allocations in the world. Allocations to growth assets increased year on year compared to the previous survey (+6%) as managers adopted a more pro-risk stance and investors looked toward a rebound in business activity despite the emergence of new Covid-19 variants.

Mandisa Zavala, Head of Asset Allocation at Alexforbes, explains, “Increased equity allocations were primarily funded by a reduction in cash allocations, with domestic equities being favoured over international equities owing to more attractive valuations within the South African market.”

The report also shows growing interest in sustainable investing. Alternative investments represent around 6.5% of the Government Employees Pension Fund’s asset allocation, with a strong emphasis on developmental or impact investing with an infrastructure focus. Beyond the Government Employees Pension Fund there is growing appreciation that retirement funds can play a role in generating economic growth in South Africa through infrastructure investments, with larger funds indicating a desire to increase allocations.

Mandisa commented, “South African investors continue to make full use of their permitted allocations to offshore assets, with international assets representing around 28.5% of total allocations in the survey, with this level expected to increase following the increase in the maximum offshore allocation to 45% in February 2022.”

Fiona Dunsire, Regional Wealth Leader at Mercer, says, “Asset allocation is one of the most important decisions an investor makes. A thorough assessment of risks is critical to constructing a portfolio that seeks to meet your objectives, while also being positioned to capitalise on opportunities and mitigate unforeseen risks in a timely manner. To help inform asset allocation it can be useful to review portfolios against the trends of global institutional investors and peers around the world.”

According to Mercer investors should consider the following five actions for asset allocation:

  1. Explore alternative strategies

Alternative investments, such as private equity, private debt, real estate and infrastructure, could make a difference to outcomes. Over the many periods analysed, a 60:40 equity:fixed income portfolio would have been improved with the addition of alternatives.

  1. Reassess China exposure

Many investors would benefit from having a larger allocation to China’s onshore market through a dedicated China equity allocation.

  1. Protect against inflation

Portfolios should be assessed for sensitivity to inflation and any appropriate changes considered.

  1. Invest sustainably

Sustainable investing beliefs should be established and start should be made on implementation in investment programs, for instance by developing total portfolio climate-transition plans.

  1. Challenge your home bias

Although many investors face investment restrictions and other factors that lead to a large domestic allocation, there are a number of reasons to consider additional diversification for portfolios.

Mercer’s report highlights how pension fund investors are evolving across the global investment landscape, while serving their beneficiaries and stakeholders locally. It summarises the decisions investors in Latin America, the Middle East, Africa and Asia – representing more than US$5.9 trillion in assets under management – are taking with their investment strategies.
Categories: Mercer.