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Analyst in “zombie investor” jibe at schemes

GLOBAL – Pension funds – along with other investors such as Asian banks and Japanese private investors – have been branded “zombie investors” by a respected economic commentator.

Anatole Kaletsky, economic commentator of the UK’s Times newspaper and principal of the GaveKal research institute, has attributed current low long-term interest rates to four groups of ‘price-insensitive’ investors in bonds.

They are: western pension funds, Asian banks, insurance companies and Japanese private investors. Kaletsky calls them “zombie investors” because of what he describes their appetite for long-term government bonds without taking into account their value.

He argues that the idea that bonds are a good match for long-term commitments is “an illusion”. The comments appear in a piece called 'On Bonds and Zombies' on an investor website.

“A steep rise in inflation will cause interest rates to rise, which will decrease the value of the bond portfolio. At the same time the commitments will grow strongly as well,” he says.

Kaletsky also notes that insurers are returning to their roots: insuring against the lowest possible risk. As a consequence, actuaries, who prefer long-term bonds, are taking over from asset managers.

Dutch pensions and investment manager Compendeon agreed with the prediction that there could be interesting opportunities in equity markets.

“So pension funds ought to find out how they will tackle problems with their coverage ratios if interest rates stay low, or even fall further,” said the firm’s Harry Geels.

And he sought to dissuade pension schemes against purchasing long-term bonds, because of the strong price rises. “We advise an asset allocation with a relatively low interest-sensibility. In case of a low coverage ratio, we propose interest rate swaps for closing the duration gap.”

Geels recommends not to wait until 2006, when the new financial assessment framework, or FTK, of the Dutch pensions regulator will come into force. “Then all the schemes might need to buy the same stocks, which could lead to detrimental prices.”

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