UK - Pension funds are expected to increase their bond exposure to as much as 40% over the next ten years, according to consultancy, Watson Wyatt.
Bonds are set to make up 35% of UK pension fund holdings within the next five years and over 40% within ten, according to the firm. Currently, the average bond weighting for a UK pension scheme is around 25%.
In a survey of over 200 investment fund managers undertaken by Watson Wyatt, around 75% of respondents said that they expected pension funds to move at least 5% of their portfolios to bonds over the next five years, with 20% expecting to see a shift of over 15%.
Senior investment consultant at Watson Wyatt, Nick Horsfall, called on fund managers to be more creative with bonds if they are to benefit from the current industry trend away from equities and towards fixed-income products
It's a terrific opportunity for investment managers and clearly they recognise this, said Horsfall.
But to grab a large share of this growing market, investment managers need quickly to develop innovative bond products that are not only a close match for pension fund liabilities but offer strong returns.”
Horsfall added that high yields, limited price indexation and emerging market bonds were clear contenders here, but more work had to be done to develop bond benchmarks.
“The demand is there but it is currently not being matched by supply.
Watson Wyatt believes there are two phases to the pension fund transition to bonds. At present, there is the rapid shift towards bonds as trustees and companies recognise that they are structurally overweight in equities. This move is expected to be over by 2006.
The second stage is the ‘long grind’ - a steady move towards higher bond weightings as schemes mature which will last for many decades.
Despite expectations of a significant shift towards bonds, investment managers were in a sanguine mood about the impact on UK equities. About 30% said they thought there would be no net effect of UK equities, while a further 60% described the shift as having only a mildly negative impact.
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