UK - Pension funds could benefit by a more diversified bond portfolio, according to Morley Fund Management.
It said that most funds concentrate their investments in the benchmarked fixed income sectors of government bonds, high grade corporate debt and some overseas bonds. But higher returns are on offer from non-benchmark fixed income instruments such as high yield, swaps and other bond derivatives – financial tools that could also help large pension funds diversify.
Head of UK sovereign products and hedge funds Shahid Ikram said: “The more sophisticated trustees appreciate that there are diversification benefits to taking off-benchmark risks.”
With the UK fixed interest benchmark delivering returns of around 2.7% and a standard “core” portfolio managing to return around 3.5%, the added performance of using a “core plus” strategy can be significant – giving outperformance of around 60 basis points in the year to December 2001.
Morley forecasts a boom in the market for bond products this year and said that the introduction of FRS17 could see over £80bn of pension fund money moved from equity to bonds in the next few years.
By Jonathan Stapleton
This week's edition of Professional Pensions is out now
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