The local government fund has said it will maintain its emerging markets exposure despite short-term underperformance, while Lincolnshire Pension Fund has benefited from global active management
The schemes continue to have confidence in the sector and their active managers to capture returns over the long term.
There are a couple of advantages to using an active manager to invest in emerging markets:
Schemes can use a manager's skill to select the best investments regardless of where they are listed.
There is more flexibility about the emerging markets allocation – schemes do not have to be invested when there are better opportunities elsewhere.
Pension funds typically target assets providing returns over longer time periods than other investors, as they have to meet pension promises that may be far off in the future.
By choosing investments that provide lasting returns, schemes are in a better position to provide members with an adequate retirement income.
Martin Spriggs, head of exchequer and investment for the £490m Brent Pension Fund, said it had increased its emerging markets exposure to 8 per cent in 2010. Last year, it appointed a new active manager.
Despite below-target returns since then, Spriggs remained bullish for emerging markets' long-term prospects.
He said: “The results have been below target for the year to date; value and small-company stocks have not done well.
“We believe in the emerging markets story and have [been overweight in] these markets, and we have confidence the manager will outperform in the longer term.”
Lincolnshire's active approach
There has been a shift from separate emerging market mandates towards schemes letting their global active managers handle this exposure.
Lincolnshire County Council Pension Fund is one fund to have put more faith in its active managers in this way.
Jo Ray, group manager for pensions and treasury of the £1.3bn scheme, said Lincolnshire had taken the decision to move away from a separate mandate in 2009.
This came after the fund's active managers repeatedly requested to take on the task of emerging markets investment themselves.
Where a stock is listed doesn’t reflect where its exposure is, so why limit your managers?
“When we did our allocation review, we looked at it…and decided to let the managers do their job,” said Ray.
“We didn’t provide any regional restrictions, we just asked them to stockpick the best options."
The three managers all have different attitudes on how best to gain exposure to emerging markets.
One places a relatively high allocation to Russia and China, while the others invest in established developed market companies with emerging markets exposure, such as Colgate or BMW.
Ray added: “Where a stock is listed doesn’t reflect where its exposure is, so why limit your managers?
"If you are appointing a fund manager for their expertise, you want to give them as few restrictions as possible.”
She also added investing in emerging markets was a long-term decision, and therefore the past two years' volatility was not a concern of the scheme.
Managing market volatility
Schemes should be aware of the higher short-term volatility of market prices in emerging markets debt and equities, according to consultants.
Steven White, managing director at Buck Global Investment Advisors, said: “Increasing emerging markets exposure should normally be combined with reductions to other risk factors, such as the total equity exposure or the levels of inflation and interest rate risk."
Developed market equities do provide some exposure to emerging markets
Pension funds' exposures to emerging market equity and debt are usually limited by their stated asset allocation policy.
White added: "[Schemes should] focus on their own circumstances – the need for investment return and capacity to absorb investment risk should dictate the maximum exposure to non-matching investments.”
For those already invested in emerging markets, the current uncertainty affecting equity markets does not mean they should necessarily reduce their allocation.
“Developed market equities do provide some exposure to emerging markets – via sales or even production in those markets – and this may be an acceptable route for smaller pension funds,” White said.
But gaining exposure through developed market equity is subject to a range of other factors and will miss the increasing trend of emerging market companies gaining market share.
