UK returns worst since 1974
UK pension funds reported negative investment returns of –13.9% in 2002 – the worst annual return since 1974, according to research conducted by performance specialist WM Company, now part of the State Street group.
Weak equity markets have been the driver of negative investment returns, says the research, with UK equity return of a typical fund last year being –22.5%, and international equity portfolios returning –24%. Japanese and pacific ex-Japan equities performed better than North America and continental Europe equities.
Bonds and property produced positive returns. Both UK government bonds and UK corporate bonds returned about 9.6%, with overseas bonds just behind at 9.3%. Index-lined bonds returned 8.7%. Property returned 9.1% over the year. The three-year annualised property return is almost 9% per annum, and at 11% per annum over the last ten years makes it the leading asset class.
Despite the negative returns resulting from equities, UK pension funds seem to be prepared to accept the inherent volatility in order to “secure additional long term return,” says the research.
In 2002, there was net positive investment by funds into equities, particularly into international equities, and predominantly US equities, with the aggregate equity purchases coming mainly from existing liquidity and sales of bonds – especially overseas bonds. Equity exposure for typical UK pension funds at the end of 2002 was 65%.