| UK pension fund equity allocations continue to drop |
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| 15/04/2007 | |
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UK pension funds have reduced their equity exposure by 7% in the last four years. In 2003, they had a 68% weighting in the asset class compared to 61% in 2007, according to a Mercer study. Domestic equity allocations continue to drop at the expense of international equity, with one in four funds hedging part of their currency risk. The average bond allocation is 36% in line with results of a recent bfinance survey of leading pension funds. The Mercer survey, the second of its kind, covered 651 European pension funds, including 493 UK schemes, with assets totalling €423bn. "Bonds continue to be the dominant asset class among continental European funds." In particular, the average fixed-income benchmark allocation of a French pension fund is 66% compared to 62% in Germany. The FRR, however, considered France's largest pension fund, stands out from the national average, according to a bfinance poll. It only had a 26.4% weighting in bonds in 2006. FRR's 62.1% equity allocation is also higher than the 26% average benchmark allocation for France. The difference reflects FRR's greater propensity to take risk in line with other leading pension funds. ABP and Sweden's AP3 have similar equity weightings. The survey highlights other asset allocation changes among European pension funds. Barring the UK, equity weightings have increased to 42% from 40% during 2006. The 2% increase may be explained by relative performance differentials between asset classes. In other findings, the survey has seen a material increase in the use of active currency managers. Pension funds in Continental Europe and Ireland are more comfortable investing in hedge funds than their UK counterparts, with 9% of funds on average investing in the asset class compared to 6% in the UK. Interest in private equity is also greater in Continental Europe and Ireland than in the UK, with 7% of funds investing in the asset class, up from 4% last year and compared to 3% for the UK. There is expected to be limited interest in increasing exposure to private equity over the next year. Anticipated changes "Property remains the most popular holding after equities and bonds with around half of respondents having some degree of exposure." Mercer also expects "an emerging preference for passive management against fund specific benchmarks. However, the Dutch seem to lean towards actively managed bond portfolios measured against fund-specific benchmarks." Based on the findings, the survey anticipates an "increase use of swap overlays and fund-specific benchmarks for bond mandates. These options are proving equally popular, with 10% of pension funds considering one and another 10% considering the other. Around one in ten funds has indicated an interest in adding exposure to each of fund of hedge funds, active currency and GTAA. However, interest in non-traditional strategies is not universal, with commodities, infrastructure and timber unlikely to see much asset flow based on the responses received." VB |
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