| Could UK pension funds benefit from more equities? |
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| 04/12/2005 | |
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UK pension funds posted strong results in the third quarter of 2005 with a 6.7% average return, according to WM Performance Services. This takes their cumulative return for the first nine months of 2005 to over 14%. "This has the makings of another year of strong recovery for pension fund asset values, although much can still happen in the fourth quarter," warned Michael Walsh, managing director of WM Performance Services. "The improving asset position gives some comfort and is a good news story, but pension finances are generally still weak as the effects of longevity and low bond yields hit the liability side of the equation." The average asset allocation of UK schemes was also slightly altered. Although the net cash flow was away from equities, their proportion actually increased due to the strong stock market returns. This goes against the recent trend of increasing the share of bonds in pension allocation. For Standard & Poor's Srikant Dash and HSBC's Kevin Gardiner, this might actually be good news. The two experts published a study in which they say that pension funds might be wrong in dismissing equities as risky assets, and that more, not less, could be warranted in a pension portfolio. According to their paper entitled "On the Duration of Equity", duration of equities would be in the range of 20 to 40 years, which would place them above government bonds, meaning that they could also be a good match for long-dated liabilities. Such a conclusion runs against the reweighing of pension allocation toward bonds, in some case reducing the equity allocation to nil. J.L. |
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