UK - Lack of time and resources are among the factors behind the lack of development in commodities in the UK, according to a Watson Wyatt consultant, Alasdair Macdonald.
Alasdair Macdonald told a conference on commodities
that governance, which means time and resources spent
on managing and understanding an asset class, takes “long and hard work” and influence allocation to commodities, especially for small pension funds.
He told delegates that while the “governance line” was flat the “complication” curve was “growing exponentially” - making commodities an option for big funds only, which can afford a lot of governance.
“Pension funds are not piggy banks. They are not pots of money for a rainy day. They have to pay for their liabilities,” he said.
Commodities would represent an option if done passively, so to require low governance. They also represented diversification away from equities. “For investors with a substantial equity allocation and confidence in the return case, a modest 3% to_5% allocation could be considered.”
Macdonald explained that funds were reluctant to consider diversification during the equity bull market, but following the equity market fall in the last few years, many are starting to put in place “programmes of diversification”, involving commodities as an option.
Enhanced indexing was indicated to be the preferred route until the market develops further. He told IPE on the sidelines that commodities would probably on top of the priorities list.
He mentioned Dutch and Swiss funds as diversification
leaders in Europe, with UK, France and Belgium lagging
behind. He also observed that the conservative nature
of UK pension funds, as well as governance, also
accounted for relatively slow commodities development.