More than four in 10 pension funds plan to increase the inflation sensitivity of their portfolio in 2022, according to a snap poll by investment consultancy bfinance. They want to do this by increasing exposure to infrastructure, private debt and real estate, the research found.
According to the poll, which surveyed 162 pension funds, some 48% of pension schemes intend to increase the inflation sensitivity of their portfolio by increasing their allocation to infrastructure in the next 12 months.
Private debt (39%) and real estate (36%) are also popular. Half of the pension funds surveyed were from Europe, with the rest from North America, Asia Pacific and the Middle East & Africa.
“To some extent, the asset allocation changes we are seeing here represent a continuation of some longer-term shifts, such as the shift in favour of illiquid strategies and real assets,” said bfinance’s Kathryn Saklatvala.
She added: “Yet investors’ concerns about inflation and rising rates – which come through in these statistics – are giving greater impetus to these trends.”
Some 84% of pension fund respondents are at least moderately concerned inflation will erode their ability to reach their investment objectives.
Alternatives proved much more popular as an inflation hedge than equities (18%) and inflation-linked bonds (12%). A mere 8% of respondents are planning to increase exposure to commodities to increase the inflation sensitivity of their portfolios.
It seems commodities as an asset class has fallen out of favour indefinitely with pension funds, as only 9% of pension funds indicated they had increased exposure to the asset class over the past 12 months.
ESG adjustments
The hesitation to invest in commodities is striking, as how to respond to rising inflationary pressure is probably the most pressing concern on the minds of pension fund trustees.
Perhaps it follows from the increasing importance attached to environmentl, social and governance (ESG) considerations. Four in 10 pension funds said that recent geopolitical developments, notably the Russian invasion of Ukraine, will lead, or have already led to adjustment of their ESG approach, either in-house or via changes made by their external asset manager partners.
Several others cited that, while the conflict had not itself affected what they are doing, it reinforced the need for a sophisticated ESG approach.
“Emerging market country exposures, controversial weapons and fossil fuel firms are coming under particular scrutiny,” said Saklatvala.
An anonymous Dutch pension fund told bfinance the war in Ukraine has prompted it to rethink its controversial weapons exclusion list, adding: “We will also place more scrutiny on role of state-owned companies and companies that otherwise act as extensions of the state, where the state was blacklisted under our ESG policy, even though Russia wasn’t blacklisted under our criteria prior to the invasion.”
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