UK - Schroder Investment Management has issued a caution to pension funds against a wholesale move to bonds, insisting that equities are still a safe-haven for long-term investors.
According to its latest research, ‘Investment Perspectives’, Schroders says that despite worries over future performance, and more recently the likely impact of FRS17 on balance sheets, pension funds should guard against an “inappropriate” move to bonds if stock market history is anything to go by.
The study highlights how there have only been two protracted periods during the last century when bonds have outperformed equities to any great extent - during 1930’s depression and 1970’s oil crisis. In both cases the main contributor to equity market weakness was a decline in corporate profitability. Severe deflation in the 1930s and rising oil and labour costs in the 1970s propelled this. However, for the period as a whole, equities have outperformed bonds.
Over the past 100 years, the excess return from equities over bonds has averaged 5% per annum, and in the 1980s and late 1990s equity returns have been far superior to those of bonds.
The research adds: “In future, there is every likelihood that equity returns will be less dramatic [but] equities will continue to outperform bonds by a reasonable margin.
“In the light of FRS17, trustees should consider whether the potential outperformance of equities over bonds is sufficient compensation for the increased short term volatility. The Boots fund was fortunate in having a large surplus when taking the decision to move into bonds. It was also a large fund compared with the company's market capitalisation, increasing the potential balance sheet impact.
“A move like this would also depend on market timing. At present, following a period of outperformance from bonds, the potential gains are likely to be less.”
By Madhu Kalia
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