Global pension schemes are expected to increase their allocations to private assets and Asian emerging markets, a report from Create-Research and Amundi has revealed.

The research, which is based on responses from 157 pension plans globally, managing €1.97trn of assets, showed that the two sets of underinvested asset classes offering the most attractive opportunities are private markets and Asian emerging markets (AEMs).

Indeed, Amundi chief investment officer, Vincent Mortier, said that while private markets and AEMs have had to adjust to a "new era", both still offer diversification, attractive returns and are well-placed to take advantage of the more predictable sources of value creation from secular mega trends.

The report also acknowledged that private markets have come under scrutiny as the era of market-driven returns fuelled by cheap money has come to an end, with just under three quarters (74 per cent) of pension schemes currently invested in private market assets.

However, it found that while the returns in private markets are likely to be lower than in the recent past, their appeal remains "strong" with 86 per cent of respondents expecting to be invested in three years’ time.

This expected increase was primarily driven by a heightened search for risk-adjusted returns in a low real return environment (72 per cent), further cuts in interest rates (54 per cent), more growth companies in private markets (53 per cent) and the fact that fast-growing companies are staying private for longer (51 per cent).

Private debt was the individual asset class with the most interest from pension schemes over the next three years, cited by 55 per cent of respondents, with direct lending, real asset financing and distressed debt garnering most attention.

Private equity was the second preferred asset class, cited by 49 per cent of schemes, with a specific focus on growth equity, and to a lesser extent, leveraged buyout.

This was followed by infrastructure (40 per cent) and real estate (38 per cent), while venture capital was at the bottom of the list at 28 per cent, as it was viewed as the riskiest in the current private market environment.

This is not the only underinvested asset class expected to see an increased focus from pension schemes, as the report suggested that investment in AEMs is also set to grow.

The report showed that, despite their 46 per cent collective weight in global GDP, over one third (38 per cent) of respondents currently have zero exposure to AEMs, half (51 per cent) have allocations of up to 10 per cent and only 11 per cent have allocations of more than 10 per cent.

Geopolitical issues were the primary reason for such constrained allocations, cited by 68 per cent of schemes, while other determining factors included rising trade frictions (58 per cent), high market volatility (53 per cent) and opaque governance within AEMs (51 per cent).

However, the report said that positive tailwinds, and recent reforms designed to attract foreign capital, should mean increased allocations with 76 per cent expecting to be invested in three years’ time, compared to 62 per cent currently.

"As the geopolitical rivalry between the US and China intensifies, and two rival trading and currency blocks consolidate, other Asian markets are becoming increasingly attractive for investors," Amundi Investment Institute head, Monica Defend, said.

"Increased intra-regional trade and connectivity have enhanced the regional resilience and we expect to see allocations increase in nearly every asset class.”

Adding to this, Create Research project lead, Professor Amin Rajan, said: “Private market and Asian emerging market assets have long remained underweight in pension portfolios. Now, the winds of change are evident.”

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