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Investment matters

Even the most conservative of UK balanced pooled pension funds lost money in the opening quarter of this year.

BNY Mellon Asset Servicing performance and risk analytics manager Alan Wilcock says: “Equity market returns in the first quarter of 2008 were one of the worst starts to a year we have seen on record.”

High cash weightings failed to protect funds against the downside that hit global markets, with the best pooled pension fund return coming in at -5.4 per cent, according to the latest BNY Mellon (Caps) survey.

Returns from UK balanced pension funds averaged -7.9 per cent and marked the first negative return since the second quarter of 2006.

According to the Caps survey, average 12-month figures also strayed into negative territory although some funds managed to pull off a gain.

What is surprising is the high cash weightings in some funds, one reaching almost 50 per cent. This still did not do enough to stave off the falls.

The Neptune balanced fund had a cash weighting of 43.6 per cent and yet ranked 17th with a net return of -7.7 per cent. The portfolio did fare better over 12 months, with a net gain of 4.4 per cent, ranking the fund fourth in its sector.

Other funds featuring high cash positions fared little better.

Third-ranked Newton global balanced held 21.2 per cent but its net return was around -6 per cent over the quarter. Like the Neptune fund, the portfolio shows a positive return over 12 months.

Few balanced pooled pensions featured any kind of property weighting, with the average position sitting at just 0.7 per cent. The highest weighting to property, which has actually staged a bit of a comeback in the past few months judging by the few property funds sitting atop of the performance tables, was 4.7 per cent in the JPM balanced fund.

Allocation to bonds rose over the quarter, with UK weightings rising by 0.5 per cent to 8.1 per cent while international fixed interest increased their weighting by 0.7 per cent to 2.3 per cent.

The highest holding in gilts came from the quarter’s top performer, M&G PP medium term balanced, with a position topping 24 per cent. The fund also featured a 24.7 per cent weighting in UK non-government paper, also the highest sector position in that asset class by some margin.

Highlighting the trend of balanced funds to look further afield to capture some of the growth being seen in emerging markets, the Caps survey points to a growing allocation to overseas equities, although not Western ones.

Wilcock says the traditional high weighting of pension funds in the UK fell by the biggest amount in five years and by the end of the quarter hit an all-time low of 41.5 per cent. One fund, GLG capital appreciation, features a weighting to UK equities of just 5.4 per cent and fell by 12 per cent in the quarter.

Weightings to markets such as Europe ex UK and Pacific ex Japan also fell during the first three months of the year as money was moved into emerging market equities.

Emerging markets still make a low average among balanced pooled pension funds – less than 5 per cent – but the highest weighting to this area was well in the double digits at 20.8 per cent in two separate portfolios.

Just seven funds of those listed in the survey now feature a zero weighting to emerging markets.

Looking at the fees levied by balanced pooled pensions, there remains a wide spread, which in tougher investment environments is certainly having some impact on net returns. The best performer over the first quarter, both on a net and gross basis, M&G’s PP medium term balanced fund, featured one of the lowest annual fees in the survey at 0.2 per cent.

Some funds in this sector feature much higher fees, the highest being on the St James’s Place GAM portfolio at 2.14 per cent. Its net return over the quarter was 11.5 per cent while its gross return was -11.9 per cent.

Outside the balanced pension universe, there were also disappointing returns, bar the bond sectors where the average fund advanced. The UK equity pooled pension sector saw largely negative returns over the quarter but there was one stand-out performer. Unlike in the balanced sector, one fund – Scottish Widows UK opportunities – did manage to eke out a positive gain of 0.2 per cent gross or zero on a net basis.

With economists and asset allocators offering mixed outlooks for the month ahead, it will be interesting to see what the trends of the next quarter will be among pension funds.

Pension funds are often criticised for a herd-like mentality in their management and while the balanced pooled sector certainly reflects broad similar trends to the market, such as the current bias towards emerging markets, there remains a wide variance within the peer grouping.

The best performers will be those that choose the winning asset class and are nimble enough to position themselves quickly enough to capture gains in an increasingly volatile market.


Johnson Fleming is a finalist at UK Pensions Awards 2016

The UK Pensions Awards shine the light on excellence and recognise the advisers, providers and investment managers that offer the highest level of innovation, performance and service to occupational pension schemes and their members. This year’s awards looked at advisers and providers across 31 different categories and were rigorously judged by a panel of senior […]


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