IRELAND - Defined contribution scheme investors should avoid long-term bonds as the trend towards historically low interest rates is likely to reverse over the medium term, Hewitt Associates believes.
In its InVision survey of Irish pension fund performance over the second quarter of 2010, Hewitt warned the expected reversal would make investing in the asset class a more difficult proposition in the years ahead.
It suggested defined contribution (DC) investors still attracted to the safer characteristics of bonds should focus on the shorter end of the yield curve, investing for five years instead of ten or 30.
For defined benefit schemes however, it makes sense to invest in long dated bonds in order to match the liability profile of the scheme and should opt for an active manager rather than a passive bond manager tied to tracking an index.
Hewitt also urged investors to consider multi asset funds in favour of traditional products.
Head of Hewitt Ireland's investment practice Deborah Reidy said: "We recommend that investors consider multi asset funds in place of traditional managed funds as in many cases these have superior risk/return profiles and access new asset classes not previously available to smaller DB schemes or DC schemes.
"However, the wide range in returns of multi assets funds over the last several months highlights the importance of knowing the underlying investments of the funds on offer."
The Standard Life GARS fund was the top performing multi asset fund, with a year to date performance of +6.5% through the end of June. The Friends First/F&C Diversified Growth was the poorest performing year to date, returning -4.2%.
"For the six months to the end of June, we see a range of 10.7% between the top and bottom performing funds," Reidy said. "With a greater variety of asset classes available to fund managers, different multi asset funds will have substantially different performances.
"Investors should be aware of the underlying exposure of their funds to understand how market movements will affect the overall performance."
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