South African pension funds continue to bet on equities, with 61% of portfolios invested in this asset class, higher than the Middle East and Africa region, where 55% of total assets are in equities.

According to Mercer Asset Allocation Insights’ 2022 Pension Allocation Trends in Africa report released on Wednesday, the increased reliance on equities as an investment vehicle has come as managers have taken a riskier stance in anticipation of a recovery in business activity after COVID-19 .

This is evidenced by an increase in allocations to growth assets by approximately 6% compared to the results of the previous year’s survey.

“The equity increase was largely funded by a reduction in cash allocations, with a preference for domestic over international equities due to more attractive valuations in the South African market,” says Mandisa Zavala, head of asset allocation at Alexforbes.

Investments in fixed income/bonds fell slightly from a year earlier to 30.8% from 33.2%, while investments in alternative and cash/short-term asset classes hovered around the 12% mark.

Offshore exposure

The report noted a reduction in exposure to international assets during this period, but this is expected to change significantly following the National Treasury’s decision to raise the limit on pension fund allocations to offshore assets.

“South African investors continue to make full use of their permitted allocations to offshore assets, with international assets accounting for around 28.5% of total allocations in the survey, with this level expected to increase following the increase in the maximum offshore allocation to 45% in February 2022,” Zavala believes.

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Looking ahead

The meltdown highlights several risks to asset portfolios in the second half of the year – the most pressing being Russia’s ongoing incursion into Ukraine and its disruptive effect in other parts of Europe.

Events in China due to the continued tightening of Covid-19 restrictions, which goes against global trends, heightened tensions with the US and a weakening yuan all present risks that fund managers should consider when constructing their portfolios.

Mercer says that to protect their portfolios from risk, fund managers should consider reassessing their exposure to China, assess their portfolios for inflation sensitivity, invest sustainably and challenge their bias.

“Asset allocation is one of the most important decisions an investor makes,” says Fiona Dunsire, regional wealth leader at Mercer.

“Thorough risk assessment is critical to building a portfolio that strives to achieve your goals while being able to capitalize on opportunities and mitigate unforeseen risks in a timely manner.

“To assist in smart asset allocation, it can be useful to analyze portfolios against the trends of global institutional investors and peers around the world,” she adds.

Listen to Fifi Peters’ interview with Sasfin Wealth’s Johan Gauss (or read the transcript here):

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