The term ‘low-yield environment’, which once struck fear into the hearts of scheme trustees tackling deficits, has all but got its feet under the table. We are almost, but not quite, at home with the reality, like the in-laws who came for two weeks but ended up staying for six months.
However, this new norm stretches much further than that. And schemes have been wrestling to find new ways to generate returns safely.
Inevitably, this has led to a certain amount of dialling up risk, whether that be through greater exposure to volatile assets or by sacrificing liquidity.
Part two of our global equities analysis this week asks how schemes are playing the asset class to their advantage and whether performance expectations may need to be revised.
Fund manager sentiment points to the asset class being overvalued, but this does not necessitate that schemes turn away; there would have to be a better alternative offering similar yields and levels of risk.
Data over the past several years have tracked how defined benefit funds are gradually reducing their equity allocations, as maturing funds derisk and seek to match liabilities.
Illustration by Ben Jennings
Across Europe, pension funds have steadily been chipping off around four percentage points of their portfolios’ equity allocation a year since 2008, according to Mercer. However, last year investors put the brakes on this process, sloughing just two percentage points.
Schemes need growth, and the fear of not generating adequate returns versus some exposure to volatility is becoming more closely balanced. But the filters through which pension funds access risk assets is key to helping manage this volatility.
Multi-asset funds have risen in popularity and number over recent years, while smart beta has also given schemes the ability to effectively screen in or out certain risk factors in a way that complements their overall portfolio.
Nest is one scheme accessing global equities through smart beta (you can watch Nest's chief investment officer Mark Fawcett discuss this in our recent video). But the real challenge for both DB and defined contribution schemes is assessing and comparing global equity funds.
This will become more difficult – but also potentially revealing – if the asset class is about to reach a turning point.
Maxine Kelly is editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert.
