GLOBAL - Occupational pension fund asset allocation across the major markets is beginning to acquire greater similarities with a moderate trend towards greater bond investment emerging in countries with traditionally lower bond weightings.
A new report by UBS Global Asset Management – Pension Fund Indicators 2005 – identified a moderate trend towards greater bond investment in the US, UK and Australia.
“Pension funds in Switzerland, Sweden, the Netherlands and Japan all traditionally held very high bond allocations,” the report noted.
“Encouraged by the equity bull market in the 1990s, funds in these countries began to embrace equity investment in the late 1990s and early 2000s, a move that seemed by early 2003 to have been mis-timed. The 2003 and 2004 recovery may have restored some confidence in equities in these countries.
“In the US, UK and Australia, pension funds have had larger equity weightings for some time but, as defined benefit pension funds in these countries mature and thus begin to focus more sharply on their liabilities, a moderate trend towards greater bond investment is emerging. The net result is that pension fund asset allocation is beginning to acquire greater similarities across the major markets, although differences still persist.”
The report also found international investment by pension funds has been on the increase, particularly for Dutch pension schemes, which UBS said could reflect the “relatively small size and thus limited opportunities in their home market”.
“General recognition of the diversification benefits of international investing is evidenced by a tendency for governments and regulators to remove, or at least relax, any remaining restrictions on investing outside home markets,” the report stated.
Among other report conclusions were the prediction that non-traditional investment solutions will become increasingly common as pension schemes up the focus on liabilities and that the trend to defined contribution and hybrid schemes will become more wide spread.
According to UBS, capacity constraints could emerge if large pension funds continue to expand their interest in alternatives, similar to those already present in the UK commercial property market.
“Conversely, small pension funds may take the view that the amount of trustee time needed to research, understand and select alternative investments is unjustifiable,” the report noted. “Between these two poles, medium-sized funds will need to take a fund-specific view, on the suitability of, and thus commitment to, alternatives.”
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