UK - Pension funds returns were down almost -13% in the three months ended 30 September, according to initial estimates from performance measurement consultancy, WM Company.
The out-turn for the nine months to September-end was -17%.
But pension funds are being urged not to quit equities, despite the “severe” results.
Eric Lambert, WM executive director, said: “These results pose a number of problems for asset managers, trustees and fund owners.
“However, it is important to put these figures into context. Many asset managers are saying that the equity markets as a whole now represent fair value and that it is possible to buy good companies at reasonable prices.” Weak markets have meant that some institutional investors have already shifted out of equities into bonds. And recent underperformance might increase pressure on pension fund trustees to follow suit in an effort to reduce risk, but this could be a very poor time to switch, said WM.
“History shows that upturns in equities can be every bit as dramatic and unpredictable as downturns. Also it is possible that inflation will revive and bond prices will slide.
“For long term investors a sound strategy is to buy and hold equities, as an asset class, rather than attempt market timing.”
Funds have been progressively reducing their exposure to equities. In 1993 the average fund had over 80% in equities; the current figure is 62%. But the overseas component has been rising steadily. The US, as the dominant global equity market, has benefited most.
“We have seen the major equity markets in the US, Europe and the UK move in tandem throughout the current bear market,” added Lambert.
“You expect a fall in one market being offset by a rise in another. This has not happened, major markets have moved in a synchronised way, providing evidence that not all investment theories work in practice.” Some relief has been provided by strong performances of defensive assets such as bonds and property.
“Property is the forgotten asset, but it has held up well, returning about 6% in the nine months to 30 September. Property was the original alternative investment and has provided excellent diversification,” said Lambert.
Lambert also highlighted the dilemma faced by employers offering final salary schemes.
“These figures show the financial risks to sponsoring employers continuing to offer [such schemes.
“On the other hand employees, and their trade union representatives, are finally realising the value of a defined benefits pension scheme as part of their overall compensation package.”
However for people retiring from a defined contribution scheme, the current environment is bleak, with the “double whammy” of having a fund that will have shrunk by about 11% in the last year and having to buy expensive annuities on low gilt yields, estimated WM.
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