Equity allocations at some of the largest pension funds around the world were on the rise in 2009. This change, however, is more likely to reflect a rise in the market value of equity rather than active investment choices. A closer look at the strategic asset allocations of twelve large global pension funds reveals that most have actually reduced their benchmark allocation to equity. bfinance collected asset allocation data from a sample group of twelve leading global pension funds. The figures represent their actual allocations at the end of the calendar year 2009.[1]

The average equity weighting for the sample group increased from 34.4% to 38.2% last year. Calpers saw the equity value of its portfolio increase from 41% to 54%. The pension fund’s global equity portfolio was the biggest gainer among asset classes last year, with a 35% return. Driving the increase was a more than 43% gain from investments in international equity, including emerging markets. Yet last year, Calpers also cut its strategic allocation to global equity from 56% to 49%.

We observe a similar trend at COREM. The market value of its equity holdings increased from 14% to 17% as the S&P 500 gained 23.5% for the year; yet its strategic (benchmark) allocation to equity is 15% which is below its actual year end weighting. Universities Superannuation in the UK would only provide strategic allocation figures for both years; however, these too show a drop in the fund’s strategic or reference equity allocation from 71% to 68%. France’s FRR ended the year with a 47% weighting in equities. Its strategic allocation for the asset class is 2% lower.

Some of the best returns in 2008 came from funds with a particularly heavy weighting in fixed-income. Germany’s energy giant E.ON had a 62% weighting in bonds and a 17% cash position in 2008 which helped limit its loss to 2% while the average loss for the group was 19%. In 2009, these same factors worked against it as the S&P rose 23.5% while E.ON posted a return of 6%, the lowest in the group. “To implement the company’s investment objective, E.ON generally pursues a liability-driven investment (LDI) approach, notes the company’s most recent annual report released in March 2010. “The LDI strategy may involve the use of derivatives such as interest rate swaps and inflation swaps.” A cornerstone of the strategy is its heavy reliance on bonds.

With the highest strategic allocation to equity in 2008, USS posted a loss of 27% that year, the worst performance in the sample group. While it reduced its strategic allocation to equity in 2009 by 3%, it still had the biggest strategic asset allocation to the asset class, contributing to its 21% return, the top spot it shred with NPRF in Ireland, which has the second highest weighting to equity in the group.

V.B.