Global Investment Review

Global Investment Review

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Performance statistics - cross-country summary

Balanced funds generally staged a strong recovery worldwide. This was particularly the case for countries such as Hong Kong, Indonesia and Mexico that can now be fairly described as having recovered from the sharp corrections of several years ago.

Returns for median balanced funds, where the information is available, are illustrated in summary format for the one and three years ended 1999.

The typical balanced fund asset allocation differs very substantially by country. Equity orientation is most notable in Hong Kong, Ireland, Malaysia and the UK, whilst Germany’s pensionskassen remain relatively under-exposed to this asset category. Those countries with relatively small domestic equity markets tend to favour foreign equity allocations (Belgium, Hong Kong and Ireland). These various asset allocations will invariably result in different investment performance independent of any currency or inflation influences. Therefore, investment performance and asset allocation should ideally be reviewed within the context of the underlying objectives and liabilities for particular funds. The direct comparison in US$ terms or net of inflation does, however, illustrate how different the cost of providing retirement provision can be across the various countries analysed.

Asset class analysis

Closer analysis by asset category highlights some particular features of investment performance during 1999. Bond markets were particularly weak, with negative returns for many of the major developed countries, most notably Australia, Canada, the Netherlands, Switzerland, UK and the US. For the latter, domestic fixed income performance posted its second worst year since the relevant index’s inception in 1976. Bonds were generally impacted by concerns about growing inflationary pressures, a concomitant tightening of monetary policy and a debate relating to the expected downturn in economic growth rates.

Considering the poorly performing bond markets, the buoyancy of balanced fund returns during 1999 was perhaps even more remarkable. Equity markets generally during 1999 were strong. This strength was often underpinned by large capitalisation outperformance, often by technology or telecommunications stocks such as Cisco, Nokia and Nortel.

Investment performance by Japanese domiciled pension funds recovered sharply in 1999 recording some of the best returns for a decade. In a non-inflationary or even deflationary environment this made for a very strong real return figure, mainly driven by the dramatic recovery of the domestic stock market.

There appears, once again, to be some correlation between those economies suffering sluggish economic growth and those savings systems that have provided fairly poor investment performance. On analysis of the three-year median balanced fund performances, the New Zealand, Japanese, Hong Kong and Swiss markets tend to have underperformed. These economies can fairly be described as having been relatively weak, often characterised by deflationary environments during the late 1990s.

Global deregulation

Pension issues have increasingly received more attention globally with many governments addressing the long-term savings environment more keenly. Four government inspired strategies can be identified globally namely deregulatory, privatising, reforming or enhancing coverage. Canada, Hong Kong and Mexico, for example, have or are significantly reforming their systems by partially or fully funding first tier pensions. In Belgium and Portugal the privatisation of large, previously state-owned, companies has entailed the transferral of assets to newly established pension schemes. Japan represents the major market that has undergone greater deregulation than elsewhere and this was initiated by growing worries regarding pension solvency. In Ireland and the UK, markets with relatively developed pension systems, government initiatives have focused on trying to make for greater comprehensiveness as occupational funds currently cover about 50% of the working populations. The remaining countries covered in this research either enjoy well funded and comprehensive savings systems (the Netherlands, Singapore and Switzerland) or provide little real incentive for employers to operate pension schemes (Germany and New Zealand).

Strong real returns

Although investment strategies of retirement funds in most countries focus on achieving real returns over significantly longer periods than one year, it is nevertheless of interest to compare the performance in the various countries against their respective levels of inflation. Real returns for the one-and three-year periods ended 1999 are measured by comparing the actual local currency median balanced returns against consumer price indices (CPI). The results indicate that the benign inflationary environment in most of the major economies during 1999 generally produced strong real returns for pension funds in these countries. The low returns achieved in Japan and Malaysia, by contrast, were insufficient to exceed price inflation over the three years to end 1999.

It is often an important objective in the investment of retirement fund assets to obtain a return that in the long run exceeds the rate at which salaries increase. For those plans where benefits are linked to salaries at or near retirement, it is vitally important for assets to grow (via investment returns) at a faster rate than liabilities (via salary increases). Even in defined contribution plans, which do not promise benefits linked to salaries, expectations are that benefits will be reasonable by reference to the employee's standard of living at retirement, which can be measured by higher salary levels at that time. The one- and three-year results show that salary inflation has generally been running at higher levels than price inflation, with Japan, Malaysia and the Philippines producing net negative returns over the three-year period.

Global Asset Study Performance Book 1999 -September 2000.

FEES

The table below shows some comparative data on the level of investment management fees paid by domestic institutional funds for US$100 million domestic balanced mandates.

There are significant differences in fees charged for domestic balanced mandates with the Netherlands, Ireland and Canada, in particular, representing low investment management only fee environments. Much depends upon the relative asset allocation underlying domestic balanced portfolios. It should follow that greater foreign asset allocation makes for higher fees but in reality there is little or no correlation, for example, Irish and Dutch domestic balanced funds are very foreign orientated but achieve the lowest fees. By contrast, Swiss and US domestic balanced mandates have less foreign asset allocation but higher fees.

Investment management fees in Australia, Hong Kong, Switzerland and the US are notably higher than elsewhere. In the US, the ‘No Favoured Nation Clause’, combined with a willingness to pay for active specialist management (in the expectation of superior return), has encouraged a high fee culture. In Switzerland, a notably opaque market has not encouraged competition, although fee levels have dropped significantly over the past three years.