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Global pension asset allocation in 2013


A Towers Watson’s Global Pension Assets Study shows that the average global asset allocation in 2013 was 52% equities, 29% bonds, 18% other and 1% cash.

Note the bond allocation. 29%.

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IN SUM

The recently published Towers Watson’s annual Global Pension Assets Study shows that among the 13 major pension markets studied (representing nearly $32 trillion) the average global asset allocation was 52% equities, 29% bonds, 18% other and 1% cash at the end of 2013.

The bond allocation, at 29% of total pension assets globally, is significant for Individual Investors.

DETAILS

Despite past headlines advertising the great rotation out of bonds and other headlines that inspire bond panic at the prospect of increased interest rates, the bond allocation of the average pension plan globally remains around 1/3rd.

(Click chart for larger image or go to pionline.com)

2013 global pension asset allocation

1/3rd is roughly the same allocation as the Pension Investment Association of Canada (PIAC) composite average asset allocation of Canadian pension plans. See here.

One of the premises of this blog is that Individual investors can mimic PIAC’s composite allocations as a starting point for their own investment portfolio. At year-end 2012, the PIAC allocation to bonds was 32%. See here.

Why Bonds?

Bonds are the bedrock of most all portfolios. They provide some certainty of return and give the portfolio stability especially when stock markets are unsettled.

In the pension world, bonds provide a match to or an offset against pension liabilities. (Bond interest payments look like the mirror image of retirement income payments and thus are a good match). So liability-matching means having some offset against long-term liabilities with long-term (i.e. long-duration) bonds. Pensions have long-since changed the composition of bond allocations increased allocations to Provincial, Corporate and High-yield bonds to pick up a yield premiums over Canada government bonds. Some employ a bond barbell strategy (short-term Canadas and long-term corporates for example).

Even at low interest rates, bonds still perform a service to the Individuals’ portfolio.

For those concerned about interest rates moving up, they have likely swapped longer-term for shorter-term bonds. (A barbell strategy of sorts).

Regardless of the market environment, regardless of the bond allocation composition or the prospect of rising interest rates, the bond allocation in most all institutional portfolios is fairly constant at 1/3rd.

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Next time? More Risk Management.
Doug Cronk CFA, PRM is a Pension Investment Officer

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