Investors on the hunt for asset performance

Both UK and overseas equities have performed better than expected and delivered strong returns, while bond yields have remained low this year. 

Tapering will come, albeit at a slower, less aggressive pace.

But if the price of risk assets continues to rise into 2014, investors may question whether bubbles are emerging, said Tim Giles, principal at Aon Hewitt.

“Which probably means people need to think about [whether] they are really getting good value out of those risk assets and at some point [whether] they like to step back from having so many holdings,” said Giles.

Schemes will need to spend time thinking about fair value for assets in order to establish when to lock in profits on their investments, Giles said.

However there are also concerns that tapering of quantitative easing could undermine risk assets, giving DB schemes more reason to derisk.

“During the last few years there’s been money pumped into the market and the monetary conditions have been very easy... so that’s going to start to reverse and that might put the brakes on this good run we’ve had in the markets,” said Kevin Frisby, investment partner at LCP.

Terry O’Malley, director of international institutional sales at fund manager Calamos, said its global outlook is cautiously optimistic, while noting volatility will continue.

“The Fed’s decision to delay the QE taper was met with a roar of approval from global and emerging market equity markets and the concerns that hurt equities earlier in the year dissipated one by one,” he said. “But tapering will come, albeit at a slower, less aggressive pace.”

The manager uses convertible bonds to gain some of the upside of equity movements while providing some protection against market falls.

While DB schemes that are fully funded may be able to afford investing in gilts, Frisby called upon underfunded schemes to diversify their risk assets by investing in absolute return managers like diversified growth funds, hedge funds and absolute return bond funds.

He also predicted schemes will continue investing in managers buying assets off banks that are trying to deleverage.

But Nick Secrett, investment director at PwC, said trustees and managers may also begin to question the move into hedge funds and may start to slow down their investment as a result of lower-than-expected growth within the funds.

“We haven’t necessarily seen the return from hedge funds that people have been expecting since all that money started moving into them, and so at some stage people are going to start questioning what the circumstances are under which hedge funds are going to start delivering,” said Secrett.

Almost half of DC schemes now have multi-asset or diversified growth fund strategies in the growth phase of their default strategy, and some experts think next year could provide further opportunities to diversify their basic investment offering.

“If schemes are going through some sort of redesign phase then timing-wise it would be good to start introducing some more diverse strategies, and take some of the money out of equities and move it into something more focused on absolute returns,” said Frisby.