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Corporate bonds outperforming equities

UK corporate bonds outperformed equities by almost 20 per cent in 2001, according to the latest Barclays Capital equity-gilt study.

Corporate bonds returned an average of 6 per cent for the last calendar year compared with average equity returns of -13.8 per cent, gilt returns of 0.6 per cent and cash returns of 4.8 per cent.

However, property was the year&#39s top-performing asset class with a return of 6.4 per cent.

Despite persistent equity outperformance during the 1990s, two years of negative markets mean that corporate bonds now have a stronger 10-year return than equities. Corporate bonds average 9.6 per cent a year for the past decade while equities average 8.6 per cent.

The dominance of bonds has been marked by a shift away from equities in the pension fund market following regulatory changes such as the scrapping of the minimum funding requirement and the introduction of accounting standard FRS17.

Barclays Capital director of UK strategy Mark Capleton says: “Institutional investment is undergoing a secular asset allocation shift away from equities into bonds and this is particularly true for pension funds.

“Bond demand will be met in part by increasing gilt supply in the near to medium term as public finances move back into deficit but possibly the only way to achieve an orderly asset allocation transition is to see corporate UK restructuring its balance sheet accordingly.

“We believe that this sort of balance sheet restructuring will become popular in the UK as economic activity picks up.”

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