Editor's blog: Here are five data lessons for institutional investors from UBS Global Asset Management's Pension Fund Indicators 2014 – from the slowdown in the rush out of equities, to steady growth in fixed income.
The departure from equities has slowed...
On the graph below, the blue and tan-coloured bars represent UK and overseas equities respectively. After a decade of reductions, the trend away from them has levelled out.
Obviously, the performance of equity markets will have pushed up the proportion of equities in schemes' portfolios, but such performance also weakens the case to sell.
"When the performance is so strong, it kind of seems rude to rebalance out of it, especially when it's your home market," commented Ian Barnes, head of UK & Ireland at the asset manager. All charts and data are sourced from UBS unless otherwise stated.
The departure from equities has slowed...
On the graph below, the blue and tan-coloured bars represent UK and overseas equities respectively. After a decade of reductions, the trend away from them has levelled out.
Obviously, the performance of equity markets will have pushed up the proportion of equities in schemes' portfolios, but such performance also weakens the case to sell.
"When the performance is so strong, it kind of seems rude to rebalance out of it, especially when it's your home market," commented Ian Barnes, head of UK & Ireland at the asset manager.
All charts and data are sourced from UBS unless otherwise stated.
The average pension scheme in this country currently has 46 per cent of its portfolio in equities, and 35 per cent in bonds.
...but over the longer term the trend is startling
The percentage ownership of UK equities has slid over the past few decades, with a similar pattern for insurance companies, while overseas ownership has ballooned.
1989 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2006 | 2008 | 2010 | 2012 | |
Pension funds' ownership of UK equities | 30.6% | 21.7% | 19.6% | 17.7% | 16.1% | 15.6% | 16.0% | 15.7% | 12.7% | 12.8% | 5.6% | 4.7% |
Overseas ownership of UK equities | 12.8% | 30.7% | 33.0% | 35.7% | 35.7% | 35.9% | 36.1% | 36.3% | 40.0% | 41.5% | 43.4% | 53.2% |
Leaving aside the philosophical discussion of whether UK pension fund money should actually be used to fund companies that make up the economy rather than our government's ability to move further into the red, this trend also has implications for the ability of pension funds to drive change at UK companies.
Shareholder activism will have to come from a much more international standpoint if it is to impact widely on companies: UK schemes have a fraction of the ownership power than they used to.
Volatility is historically low
The Volatility Index, or Vix, demonstrated by the graph on the right, is below long-term averages. This has puzzled investors, given the recent geopolitical instability in Ukraine and the Middle East.
This together with equities' strong performance over past year, with the uptick shown in the graph on the left, is making pension funds think twice about diversified growth strategies and other investment products that have been marketed as providing equity-like returns with lower volatility.
If the volatility control has proved less necessary, you just hope the returns have been sufficiently 'equity-like'.
The global bond market remains steady on demand for safety
The global bond market shows no signs of reversing its growth, with the report concluding greater issuance of non-government debt has been encouraged by factors including disintermediation, where savers and borrowers are connected directly rather than through banks, and securitisation, where new finance is raised via asset-backed bonds.
Our story that UK pension funds poured £24bn into low-yielding government gilts last year demonstrates the kind of forced buying that is keeping demand heavy.
No wonder property goes from strength to strength
Finally, a compelling graph on why pension funds such as Kent and the Plumbing and Mechanical Services Industry Pension Scheme have seen such value in property.
Compared with the poor ratio between the volume of noise and the volume of investable assets, property across major pension fund markets has provided inflation-beating returns over the best part of two decades, on an annual average basis.
