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Pru is moving into equities for life fund

Prudential is increasing its equity exposure in its 73bn life fund.

It has boosted UK and overseas equity exposure while reducing property and fixed-interest holdings due to concerns over yields and falling interest rates.

Investment director Martin Brookes, who runs the mammoth portfolio, says equities are looking increasingly attractive, with earnings’ growth outpacing price growth, bringing down price/earnings ratios.

He says bond markets are looking unattractive with corporate and Government debt spreads – the risk premium paid on corporate bonds over gilts of comparable duration – compressed to such an ext- ent that risk is purely on the downside.

For example, BBB-rated corporate bonds, which paid 300 basis points over gilts four or five years ago , are now only paying between 120 and 130 basis points over when the minimum that Brookes is seeking is 180 basis points.

He also believes longer-dated gilts, currently yielding up to 4 per cent, should be yielding 5 per cent, given the duration risk for investors.

Brookes says property has peaked in some sectors, such as shopping centres and retail more generally, leading him to reduce exposure. He says: “Equities have got cheaper and the difference between equities and bonds is as attractive as it has been in the last six to seven years.”

But Investec fixed-interest fund manager Russell Silberston says he expects gilts to outperform and yields to edge up to 5 per cent. He says: “We expect yields to rise and the yield curve to steepen further, gravitating back to around 5 per cent.”

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