Are you aware who are amongst the biggest fund managers in the world? Well, it is the global pension funds. As per Global Pensions Asset Study (GPAS), at the end of 2014, the pension assets of 16 major pension markets were believed to be in the ballpark of US$ 36 trillion. And of course, the US is one of the largest contributors with around 61% to this huge size.
Recently, we came across an interesting article on Bloomberg. As per this, the pension funds in US are facing unpaid obligations worth US$ 2 trillion towards the retirees. Now such shortfalls are certainly distressing. Thus to narrow the gap between assets and obligations to the retirees, these funds are now considering other investment options and are showing more interest in stocks listed in emerging markets. The pensions are expecting these emerging markets to generate better returns and outperform the in US' returns in the long run.
Since these funds are looking forward to commit their money for long term period, the investments will be done very tactically.
So, can India lure these long term funds?
When we talk about India, unlike any economy, the country has witnessed various phases of upturns and downturns. However, with the increase in the pace of domestic savings and investment rate, it places itself very comfortably in terms of economic resilience. Further, the Indian government is already taking several steps to make the investment environment more conducive. Growing importance of more disclosures and corporate governance will set the stage for Indian stocks to find an allocation in pension funds. By nature, these pension funds investments are done for a long term time frame. This is safe till some extent compared to volatility as witnessed in the other FII pack.
Hence, given the nature and volume of pension fund investments, a successful entry in India will bring more depth to the Indian capital markets along with weeding out some of the volatility associated with foreign funds.
Having said that, uncertainty in China alone cannot lure pension funds to India. The sustainability in earnings growth of Indian companies and the government's execution track record in reforms will play an important role in luring the pension funds to participate in India's growth story.