In Africa, Asia, Latin America and the Middle East, pension funds are increasing their exposure to equities at the expense of fixed income, according to a new report by Mercer.

Over the five-year measurement period, in aggregate, average allocations to equities for the growth markets covered rose eight percentage points to 40 per cent, while fixed income allocations decreased 11.3 percentage points to 45.6 per cent. Allocations to alternatives, cash and other asset classes accounted for the rest and saw minimal change.

In Asia, wide differences exist between countries, noted the report. For instance, fixed income allocations in Thailand reached 73 per cent, while Indonesia’s cash allocations were 45 per cent. Hong Kong had the highest equity allocation at 66 per cent, while South Korea had the largest exposure to alternatives, at 11 per cent.

“Like other growth markets, Asia is seeing pension reviews and reforms with both the establishment of new and enhanced pensions systems, and a general shift towards defined contributions, away from defined benefit plans,” said Janet Li, Mercer’s wealth leader for Asia, in a press release. “With more than half of the world’s middle class residing in Asia and evolvements in pension structure and delivery, effective investment solutions are essential to meeting the future needs of Asia’s ageing societies.”

While the report found that significant home bias remains in growth markets, allocation to foreign assets is increasing compared to domestic assets. Indeed, as a portion of the overall equity portfolio, average foreign exposure grew from 45 per cent to 49 per cent. Of note, in fixed income, foreign exposure grew from 16 to 23 per cent.

“Investors across Latin America, the Middle East, Africa and Asia are faced with a number of challenges: they seek to achieve better investment outcomes, but in many cases also face regulatory restrictions on the amount of assets they can invest outside their home country, all while addressing ongoing political, economic and demographic shifts,” said Fiona Dunsire, Mercer’s wealth leader for growth markets. “As investors diversify their portfolios globally, they need to assess how to access the best investment opportunities and at the right cost.”

The report included data from corporate and government pension schemes, with almost US$5 trillion assets under management in total, from 14 jurisdictions. The data was unavailable for the Middle East.