South African pension funds continue to place their bet on equities, with 61% of portfolios invested in the asset class, trending above the Middle East and Africa region which has 55% of total assets in equities.
According to the Mercer Asset Allocation Insights 2022 report on pension allocation trends in Africa released on Wednesday, the increased dependence on equities as an investment vehicle came as managers took a more pro-risk stance in anticipation of post-Covid-19 business activity recovery.
This is evidenced in the about 6% increase in allocations to growth assets compared to the prior year’s survey results.
“Increased equity allocations were primarily funded by a reduction in cash allocations, with domestic equities being favoured over international equities owing to more attractive valuations within the South African market,” says Mandisa Zavala, head of asset allocation at Alexforbes.
Investment in fixed income/bonds decreased slightly on the prior year to 30.8%, down from 33.2%, while investment in alternative and cash/short-term asset classes hovered around the 12% mark.
The report noted a reduction in exposure to international assets in the period, but this is expected to change significantly following the National Treasury’s decision to raise the allocation cap on offshore assets by retirement funds.
“South African investors continue to make full use of their permitted allocations to offshore assets, with international assets representing around 28.5% of total allocations in the survey, with this level expected to increase following the increase in the maximum offshore allocation to 45% in February 2022,” according to Zavala.
Zavala highlights several risks that threaten asset portfolios in the second half of the year – the most pressing being the ongoing invasion of Ukraine by Russia and its devastating knock-on effect in other parts of Europe.
Events in China in relation to the continued tightening of Covid-19 restrictions, in contradiction of global trends, heightened tensions with the US, and a weaker yuan all constitute risks that fund managers need to consider when constructing their portfolios moving forward.
Mercer says that to shield their portfolios against risk, fund managers should consider reassessing their China exposure, assess their portfolios for sensitivity to inflation, invest sustainably, and challenge their home bias.
“Asset allocation is one of the most important decisions an investor makes,” says Fiona Dunsire, regional wealth leader at Mercer.
“A thorough assessment of risks is critical to constructing a portfolio that seeks to meet your objectives, while also being positioned to capitalise on opportunities and mitigate unforeseen risks in a timely manner.
“To help inform asset allocation it can be useful to review portfolios against the trends of global institutional investors and peers around the world,” she adds.
Listen to Fifi Peters’s interview with Johan Gouws of Sasfin Wealth (or read the transcript here):