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Major selloffs across both equity and bond markets during much of 2022 have also prompted pension funds to reconsider their allocations, with many failing to reap the benefits of having portfolios diversified across both asset classes.

“After a prolonged era of cheap money and double-digit returns, the sharp spike in inflation to its 40-year high in 2022 in the West marked a watershed,” said Amin Rajan, chief executive of Create Research.

“The key question for pension funds is how to redesign their portfolios in a world of structurally higher inflation, less accommodative central bank policy and higher geopolitical uncertainty.”

Half of the survey respondents said they expect to increase allocation to inflation-protection assets, mostly in private markets, including bolstering exposure to real estate, infrastructure and private debt, and 59% predict the impact of inflation will be negative for portfolios.

The same percentage forecast returns over the next three years will be far lower than in the past decade.

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Some 70% consider global equities a key growth engine for portfolios and the asset class most suited to delivering total returns.

Rajan said global equities were most favoured by pension funds because “they cover companies with strong pricing power, recognised brands and consistent dividends that aim to stay ahead of inflation”.

Pension funds are also on the lookout for more predictable sources of return, with 60% expected to increase allocation to thematic funds — investments focused on megatrends that are reshaping business models — and those investing in healthcare, genomics, biotechnology and ageing societies flagged by pension plans as areas of most interest.

Over three quarters of respondents expect to increase allocation to funds focused on ESG trends.

“Current allocations [to thematics] are small,” said Rajan. “Interest in thematic investing stems from the fact that the old style of investing [for example, the split between equities and bonds] no longer works. There is a need to discover new points of value creation in the post-pandemic landscape.”

Pension funds are also likely to favour active funds amid looming economic headwinds. While passive funds have thrived over the past decade as interest rates have remained ultra low, almost 70% of respondents said index investments “rely too heavily on yesterday’s winners and overinflate valuations”.

Some 16% said they expected to decrease their investment in passive funds over the next three years, and 55% expect to keep allocations the same.

“This could mark the revival of actives, if markets lose the crutches long provided by central banks. The weaknesses of passives are no longer obscured by the central bank largesse,” said Rajan.

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To contact the author of this story with feedback or news, email David Ricketts