UK - Pension funds are missing the potential for significant gains from UK equities by focusing too much attention on costly alternative asset classes, Baring Asset Management (BAM) has argued.
Mary Haly (pictured), head of UK institutional equities at BAM, said it was ironic that pension funds have allocated away from UK equities to alternatives such as private equity, when such vehicles are in fact investing in UK equities as the underlying asset.
“The pension fund is moving asset class, but actually it’s just going in the same underlying asset,” argued Haly.
“Those private equity funds are buying cheap quoted assets in the market, and yes, the owners are making the pension funds slightly richer, but they are making themselves much richer.”
Haly also criticised the trend away from UK equities in favour of bonds, to meet the demands of asset and liability matching.
According to figures sourced by BAM, the return on UK bonds has been on average 14.6% lower than UK equities over the past 12 months.
“My argument would be that if you as a company have got a deficit, other than having to increase your contributions, which you might have to do anyway, the logical response would be to buy the cheapest asset class because that’s where you can make the biggest profit,” she said.
BAM said the cheap valuation of the UK equity market has attracted venture capital and industry buyers, who have been increasing their activity over the last 12 months.
According to Haly, the pension fund market may be too slow to realise that the opportunities which exist now might not be there in the future.
“Its quite sad that pension funds have bowed away from wanting that exposure,” she said. “My worry is that we have had a two and half year bull market in equities, and then five or six years down the line thinking will change and pension funds will be buying equities that are no longer cheap.”
The government is in talks with the UK and Irish pensions regulators over how to protect members of cross-border schemes in the event of a no-deal Brexit.
The equalisation of guaranteed minimum pensions (GMPs) is at least two years away from being completed, and could take longer than four years for some schemes, a poll has found.
The Pensions Regulator will consider if schemes should be required to have professional trustees and assess the case for greater regulation of administrators and system providers, PP can reveal.
UK inflation fell from 2.3% to 2.1% in December, approaching its lowest rate for two years, according to the Office for National Statistics (ONS).