Default funds offered by defined contribution (DC) pension schemes have a much higher economic exposure to emerging markets despite the “illusion” of high domestic
exposure, researchers of UK funds worth around £20 billion (€25.6 billion) have found.
Default DC schemes have a 41% equity exposure to UK companies – yet their economic exposure to the UK economy is 13.6% versus about 22.9% for emerging markets.
The reason is the pattern of foreign revenues for UK companies, the Society of Pension Professionals (SPP) and Old Mutual Asset Management (OMAM) say in a report called The Allocation Illusion.
Duncan Buchanan, president of the SPP says that this reflects well on the UK stock market as it shows how truly global it is. For instance, UK-listed pharmaceutical company Astrazeneca only has 6.6% UK exposure compared to 93.4% international exposure.
When asked if the findings could be used for fixed income assets as opposed to just equities, Steve Kowal, executive director at MSCI, which partnered in the research, says the data would be the same as the revenues still come from the regions highlighted.
Buchanan says investors need to know where their money is exposed to and they have to become more engaged in their investments.
He also says that, from a corporate governance perspective, it is best to get emerging market exposure through UK-listed companies rather than investing directly in emerging market companies.
As defined benefit pension funds have been phased out, the message for DC investors is that they need to bring over the tools from the institutional space and have an understanding of where their money is really exposed.
Oliver Lebleu, head of international business for OMAM, says there is an assumption that UK investors want UK assets.
There is also a traditional view that the UK stock market is defensive, though this may change with the findings.
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