UK - Some UK pension funds are taking 40% more risk than they need to get the same expected return, a leading fund manager claims.
According to AXA Investment Managers, a lack of diversification and erosion of equity value has begun to undermine the long-held equity-focused strategies of pension schemes.
In its UK pension fund strategy research report, “Generating Real Returns”, the fund manager suggests that on average, over the long-term in an asset-liability world, schemes are earning 75 bps less than they should, given their prevailing level of risk.
In absolute return terms this is 20% and 40 bps.
The report identifies a number of funds that could significantly improve their chances of achieving an extra 1% per annum through some straightforward asset allocation rebalancing.
Joanna Munro (pictured), AXA’s head of UK institutional business development and head of global consultant relations, said: ”Our analysis suggests that, in general, UK defined benefit schemes are not diversifying as much as they could, or indeed arguably should. For immature schemes, implementing “enhanced” strategies makes sense because they enable schemes to generate real returns in the long run.”
The research also found that though schemes were starting to review diversification and were increasingly looking at asset classes such as private equity, high-yield bonds, commodities and derivatives, the challenge was to build a portfolio that includes theses assets but which continues to match the schemes’ risk tolerance criteria.
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