Asia pension funds increase exposure to alternatives and foreign equities

Pension fund investors in the region are looking at greater diversification and at more sustainable investing in response to the complexities of the global capital markets, according to a new report from Mercer.
Asia pension funds increase exposure to alternatives and foreign equities

Asia’s pension fund investors are continuing to diversify more of their assets outside the region, according to Mercer’s Asset Allocation Insights 2022 report, which summarizes the decisions pension fund investors are taking with their investment strategies in each region. 

Source: Mercer’s Asset Allocation Insights 2022


“In our view, this trend is one of the most critical drivers of more resilient, diversified portfolios,” Simon Coxeter, head of Asia Pacific manager research at Mercer told AsianInvestor.

While the trend shows a change of behaviour, many investors still focus much of what they invest on their home markets. For example, foreign fixed income has remained a relatively low portion of fixed income assets in the region. It has only increased modestly to 13% in the three years since the last edition of the report.

Source: Mercer’s Asset Allocation Insights 2022


“Although this may be justifiable from an investment perspective in some parts of the portfolio, such as defensive fixed income, the home bias phenomenon is still one of the most prominent elements of portfolio inefficiency across the region,” said Coxeter.


Asian pension fund investors may have made changes to where they are have invested, but they have held allocations steady over the full three-year measurement period of the report, with only small increases to equities and alternatives in that time.  

Source: Mercer’s Asset Allocation Insights 2022


“The strong performance of public equities over the few years to the end of 2021 has probably contributed to the increased exposure to equities, although in some cases these higher allocations may also reflect a shift towards less conservative, growth-oriented portfolios, and may come in response to the low yields available in domestic fixed income markets,” said Coxeter.

Source: Mercer’s Asset Allocation Insights 2022


Investors in Hong Kong made the highest equity allocation in the region at 67%. South Korea has the highest allocation to alternatives among all markets covered at 9.7%, though it decreased in this measurement period from 11.4% in the prior year. Conversely, India’s fixed income allocation is close to 89%.

In a bid to diversify portfolios, Asian investors are also showing continued interest in alternatives amid a low interest rate environment, as they seek opportunities away from the traditional asset classes.

Simon Coxeter,

“Increasing interest in various sub-segments of the alternatives space is underpinned by a range of factors, including the pursuit of higher returns, a desire to diversify away from traditional assets, and concerns about inflation,” he said.  

Although the limited granularity of publicly available pension portfolio data precludes him from drawing reliable conclusions, a search for yield is one of the forces supporting Asian pension fund investors’ appetite for assets that they may not have historically considered for their portfolios, said Coxeter.

“Anecdotally, some investors have demonstrated a willingness to explore new areas of the fixed income and alternatives opportunity sets, such as multi-asset credit, secured finance, and real assets,” he said.


Asian investors are also considering environmental, social and governance (ESG) risks when investing by going after the significant growth seen in ESG-oriented products offered, as well as adopting guidelines and principles to govern these types of investments.

Growing awareness of ESG risks, market reforms and government policies are spurring investors in Asia towards more sustainable investing practices, and the region now leads Latin America, the Middle East and Africa, according to Mercer.

However, greenwashing is still a problem in the region, said Coxeter.

“Within the asset management industry it is a concern for investors and regulators alike, and there is a growing recognition that robust manager selection is crucial in successfully identifying actively-managed investment strategies that are genuinely aligned with investors’ sustainable investment beliefs and objectives,” he said.

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