UK - Pension fund trustees should give explicit reasons for precluding the use of absolute return funds such as futures, Deutsche Asset Management claims.
The firm's global chief economist, Steven Bell, highlights the impact the Myners review could potentially have on absolute return investment by pension funds in a new report. Bell said: “Where there is a clear benefit in terms of reduced transaction costs, trustees must have an explicit reason to justify precluding the use of futures.”
Bell views the most favourable use of futures as that of offering cash and time savings when making asset allocation changes between markets. He estimated that a third of his clients had agreed to the use of futures, a third did not want to be involved and a third were undecided.
State Street Global Advisors chief investment officer Chris Woods also recommended the use of futures because of the savings that could be made on commissions and stamp duty in equity or fixed income portfolio switches.
Woods outlined the benefits of futures, saying: “You are not going to be pushing the market against you, you do not have to prepare an enormous trade list, you are essentially buying a big basket of stocks representative of the market you are buying into.”
Bacon & Woodrow partner in the investment practice Kerrin Rosenberg said pension funds considering using futures should be aware that such derivative contracts can either be used to increase or decrease risks.
He said: “You can use futures to make asset allocation changes where there is really no impact or risk to the scheme, it is just a cheaper way of doing something you could otherwise do by buying and selling equities. You can use futures in a way that gears up the risk of the fund quite a lot. If you sell a lot of Japanese equities but do not own any, you’re taking a punt on the Japanese market going down and you could end up significantly exposed.”
By David Rowley
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