Pension fund assets under management grew at a faster rate last year in Asia than in the West thanks to massive inflows and strong equity gains, but the region’s investment returns were lower due to their relative aversion to alternative assets.

Asian funds are growing but as a result of inflows to the funds rather than strong investment returns, Jayne Bok, head of investments Asia at global advisory firm Willis Towers Watson, told AsianInvestor.

“[South Korea’s] National Pension Services is a good example, their investments returns are dwarfed in size by the raw inflows that are coming into the fund from contribution; [China's] will be the same,” Bok said, basing her calculations on what these funds are known to have allocated to different assets. 

The strong growth of China's National Social Security Fund  reflects the country's sound economic conditions rather than how well the assets are being managed, and a lot of that economic growth is driven by the trade surplus managed by State Administration of Foreign Exchange, she said.

The 31 largest Asian Pacific public and sovereign funds in Willis Towers Watson’s latest top-300 ranking had US$3.7 trillion in AUM as of the end 2016, a 7% rise compared with the previous year.  The asset growth outperformed that of the world’s largest pension funds, which grew by 6.1% year-on-year over the same period to US$15.7 trillion, the advisory firm said in its report

The top-three Asian funds by asset size are Japan’s Government Pension Investment, South Korea’s National Pension, and China’s National Social Security, in line with AsianInvestor’s own AI300 regional asset manager ranking

Generally speaking, 2016 was quite kind to growth markets in Asia due to an improved economic cycle. Asian funds also invest more heavily in equities, which fared relatively well over the year, Bok said.

Source: Willis Towers Watson

Zeroing in on Asia Pacific, AUM growth in Asia ex Japan was higher, followed by Australia, and then by Japan. To some degree, this reflects the underlying allocations and relative maturity of these regions. Asia ex Japan is a younger region where pension assets are still growing, and allocations to risk assets are higher than their Japanese counterparts, Willis Towers Watson said in an emailed reply.

Fewer alternatives

However, when gauging assets growth over a longer horizon, Asian pension funds still lag behind their Western counterparts due to their lower allocations to alternatives.

While China's National Social Security Fund had the highest annualised AUM growth rate of 20.6% between 2011 and 2016 among all markets, the research shows Asia-Pacific pension funds generally grew by just 2.8% annually over the five-year period, versus 3.1% for Europe and 6.7% for North America.

Pension funds in Asia have less than 10% of their assets on average invested in alternative assets, compared with 10% to 20% in Europe and 20% to 30% in North America, she said.

Developed markets have easier access to alternative investments and there are readily available US dollar-denominated investment vehicles dedicated to the space, but in Asia it’s a completely different story, she said.

There are just more challenges in Asia -- whether in terms of the information available, investors’ familiarity with the asset class, or maturity of the alternatives market, she said.

“It’s kind of natural to expect that the average return from Asia is going to be a bit lower,” Bok said.