| UK pension funds: More bonds, alternatives, and unconstrained mandates |
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| 19/02/2006 | |
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The trend towards more alternative and bond mandates showed no signs of stopping in 2005, according to data released by Watson Wyatt. The investment consultancy said that its clients had awarded four times the number of alternative investment mandates (61) than they did in 2003 (16). UK pension funds' allocations to bonds were in keeping with the growth in alternative mandates, with the number of mandates more than doubling from 22 in 2004 to 52 in 2005, of which 19 were high-alpha, the biggest growth area. Watson Wyatt also said it awarded an additional 20 ten-year absolute return mandates, bringing the total to 35 since it introduced the concept of a long-term 'inflation plus'- type mandate for pension funds in October 2003. Other sources of growth that chipped away the equity allocation of UK pension funds include real estate, private equity, and global tactical asset allocation (GTAA), as well as currency. "Generating returns to reduce deficits and implementing risk reduction strategies are now really the top priorities for the majority of pension funds. This has resulted in many funds moving some of their assets away from benchmark-sensitive instruments to make meaningful allocations to alternative assets and absolute-return products. It is now clear that adding real diversity to portfolios is mainstream thinking", said Kevin Carter, European head of investment consulting at Watson. Derivatives On top of the diversification process, UK pension funds also sought help from derivatives in their attempt to get a better asset-liability matching. Watson Wyatt said it had advised on 17 swap transactions in the UK, up from 5 the previous year. The firm has now advised on 33 swaps and related executions with a total nominal exposure of executed instruments of £20bn. The majority of these executions involved interest-rate swaps, inflation swaps or related instruments. Watson Wyatt also advised on other banking products offered to pension funds, such as option hedges, with 14 executed transactions concerning £7 billion. "Risk budgeting, which has also now become a mainstream discipline means that liability-led investment programmes, particularly through the use of inflation-linked swaps, are more feasible. This development is likely to lead to continued growth in the swaps market, which could double in size in 2006, as pension funds and their sponsors find effective ways to manage risk through the careful use of these types of instruments", commented Mr Carter. |
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Articles of the same Topic : Alternatives |
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