The world’s pension funds are growing as an ageing population puts more money aside to pay for retirement. The global total has doubled in the past decade to almost $57 trillion. But the biggest pool of savings risks missing out on both diversification and returns by restricting its investments to its domestic markets.
U.S.-based pension funds are the biggest in the world with about $35 trillion of assets, according to a study just released by consultants Willis Towers Watson Plc. That’s almost 10 times the size of second-placed U.K. with $3.86 trillion and Japan’s $3.7 trillion, according to the report. Canada, Australia, the Netherlands and Switzerland round out the global top seven for a combined total of $52 trillion.
In the past 20 years, those pension funds have altered their asset mix. The role of equities has diminished, dropping to 45% of holdings last year from more than 60% in 2001, the study says. Alternative assets, including real estate, have grown to account for about a fifth of investments, up from 5% two decades ago.

But those U.S. investors remain stubbornly addicted to domestic securities. More than 60% of their equity holdings are in their home market, a figure that’s remained pretty constant for the past decade. By contrast, the average domestic exposure in the top seven pension markets is below 38%, and has almost halved since 2001.
In fixed income, the home bias for U.S. pension trustees is even more pronounced. About 87% of the bonds they hold are domestic issues, compared with an average of about 70% for the combined seven biggest pension fund groups.
In recent years, the concentration on U.S. stocks has been a winning strategy. The S&P 500 delivered a total return including reinvested dividends of more than 18% last year, twice the payout available from an MSCI index of global stocks excluding U.S. equities. But so far this year, returns on U.S. assets have lagged their overseas counterparts.
With the Federal Reserve likely to be more proactive than its fellow central bankers in tightening monetary conditions in an effort to subdue inflation, non-U.S. markets may continue to suffer less damage. U.S. pension funds should consider following the global trend by expanding their asset allocation to embrace more foreign securities.
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