UK – UK pooled pension funds suffered their third consecutive year of negative returns in 2002 with a median return of –18.1% according to the latest Russell/Mellon CAPS pension fund survey, with the best performers either taking a cautious or stock-picking approach.

“This is the worst calendar year performance since 1974,” CAPS said.

One of the key points of the survey is the growth in fixed income and index tracking over a ten-year timeframe. There are now 149 fixed interest funds, compared to 53 at the end of December 1992. The total asset value of fixed interest funds have risen to 18.1 billion pounds (27.3 billion euros), compared to 1.7 billion pounds.

And there are now 109 index-trackers, against 39 ten years ago. The asset value of such funds has grown to 105.1 billion pounds from 5.7 billion pounds. Over the same time, UK equity funds have grown in value to 28.4 billion pounds from 10.3 billion pounds.

In terms of the growth in assets, UK equity index tracking funds have seen a net inflow of funds of 6.3 billion pounds over the year, although market declines have taken their overall value to 47.3 billion pounds from 53.0 billion pounds as at the end of December 2001. Balanced funds have shed 7.9 billion pounds as investors have shifted money – combined with market moves, they are now down to 21.5 billion pounds from 36.0 billion pounds a year ago.

Due to their exposure to UK equities, UK balanced funds reflected the FTSE All-Share Index’s 22.7% decline in 2002 by declining 18.1% in the period. Their performance was “dampened slightly” by their fixed income and real estate holdings, says CAPS head of research and development Alan Wilcock.

Across the balanced sector, the best performers declined by 16.9%, with the median at 18.1% and the lower quartile showing a 20% fall. Over a five-year horizon, only 19 out of 65 funds surveyed have shown positive returns. “It’s very difficult to put a positive spin on these numbers,” says Wilcock.

The best performing fund in 2002 was the Prudential M&G Medium Term Balanced, with just declined by 6.3%. Wilcock said this is a cautious fund which invests 50% in stocks and 50% in fixed income. The second best performer was the Neptune Balanced, a stock-picker. The worst performer was the aggressive Glasgow Investment Managers, which is 90% invested in stocks - it declined by 28.5%.

Active funds returned a decline of 22.6% in 2002, just pipping the FTSE All-Share return of –22.7%. Wilcock says this means active funds have “turned the corner” in terms of
whether they are worthwhile or not.

UK equities hit a new low of 51.4% of asset allocation at the end of the third quarter, while overseas equities hit a high of 27.7% in the first quarter. Fixed interest took 16.6% of portfolio allocations in the third quarter, a new high.

CAPS said managers have been “keeping faith” with stocks, taking funds from fixed income – despite the overall UK equity allocation hitting a new low, the overall equity weightings have only reduced slightly over the last three years.

Asset allocations were roughly unchanged among balanced funds over the year, the survey shows. The allocation of UK equities slipped slightly to 52.8% from 53.3%, with overseas equities off slightly at 25.7% from 27.0%.

The company surveyed 85 separate institutions with a combined total of more than 197 billion pounds (296.9 billion euros) in assets.