WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
The “Pension Wars” Have Arrived
ARCHIVE: Week of March 18, 2024
It’s been a busy March for a concept we are calling “The Pension Wars.” Across the world, the managers of big defined benefit plans are hearing a chorus of powerful voices push them toward greater allocations to their home country’s stock market.
“We are concerned with the decline in Canadian investments by pension funds and its impact on the Canadian economy,” wrote a collection of that country’s big-name CEOs in an open letter published in the biggest newspapers a couple weeks ago. The zinger: collectively, pensions’ 4% allocation to Canadian equities is lower than the weight in Chinese stocks.
In Britain, something similar. Two generations ago, UK pensions and insurers owned about 1/3rd of their assets in British equities. Today the mix is in the low single-digits for both. British Chancellor Jeremy Hunt and others, namely those with careers that rely on the City of London’s status as a top global financial center, are trying to reverse the decline. “I will introduce new requirements for DC and local government pension funds to disclose publicly their level of international and UK equity investments,” Hunt said in his spring budget speech.
The Korea Economic Daily reports that South Korea’s National Pension Service (NPS) will deploy the equivalent of $8.2 billion into stocks that have been identified as being Korean corporate governance dynamos. As the world’s 3rd-largest pension fund, the NPS’s $788 billion under management is massive, easily exceeding the $464bn inside the four walls at California Public Employees' Retirement System (CalPERS). We think the NPS’s current commitment is just the first step toward a greater allocation to Korean equities in general.
Double the size of NPS is the world’s 2nd-largest player, Norway’s sovereign wealth fund, whose $1.5tn is deployed in such a manner that it famously owns 1.5% of global listed equities. That fund has 71% in stocks, with large chunks of the remaining 29% in equity-like concepts such as infrastructure.
With a few pennies more than Norway’s pension fund is the world’s top dog, Government Pension Investment Fund (GPIF), Japan’s $1.52tn behemoth. It is akin to CalPERS times three. Its asset allocation is almost comically simple: 25% each in domestic equities, foreign equities, domestic fixed income and foreign fixed income.
Frustratingly for GPIF, its most recent report tallies a compound investment return of 3.99% from 2001 through Q3/2023. If Norway’s fund has 71% in equities and GPIF has 50%, who is to say it would be “wrong” for the latter to up the ante in search of greater returns? We think 2024 is the year GPIF ups its Japanese equity weight.
Finally, the US is also fighting the Pension Wars. Beyond defined benefit divestiture campaigns in Chinese equities, the emphasis of late has really been on the defined contribution side of the business.
The Secure Act 2.0 is starting to auto-enroll into 401(k)s the so-called “long-term part-time” employees who previously were often shut out of their company’s plan. Additionally, the act provides business tax credits for starting retirement plans in the first place. It also gives credits for companies who match contributions and those who engage in additional auto-enrollment concepts, namely for new employees. That money will no doubt flow primarily into US equities.
We think the Pension Wars are a big theme for 2024. Explicit initiatives to boost domestic equity allocations in both defined benefit and defined contribution plans is where the wind is blowing. Countries such as Japan and Korea, who have large pension systems relative to the size of their stock markets, stand to benefit the most.
For more information, contact your WisdomTree representative or visit WisdomTree.com/investments.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. For a prospectus or, if available, the summary prospectus containing this and other important information, call 866.909.WISE (9473) or click here to view or download the documents. Read the prospectus or, if available, the summary prospectus carefully before you invest.
Past performance does not guarantee future results. Important Risk Information: There are risks associated with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks. This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Kevin Flanagan and Jeff Weniger are Registered Representatives of Foreside Fund Services, LLC. WisdomTree Funds are distributed by Foreside Fund Services, LLC.