UK – Local authority pension funds’ posted negative average returns for the first time in 13 years for the year to March 31, 2001, returning –6.3%, according to performance measurement consultancy WM Company.

The consultancy points the finger at setbacks in the equity markets in the last twelve months, and especially within the technology and telecom sectors.
Overseas equity returns were even more disappointing than domestic, with foreign equity returns at –17% and UK stocks at –9%, the company says.

“ Despite marked market volatility the UK equity performance over the last two years now averages zero and is the worst performing asset over this period,” says Karen Thrumble.
“ This is despite local authority funds actually managing to outperform the FTSE All Share index in the latest year by some 2%, the largest margin since our analysis began,” she adds.

Fixed income returns remain in positive territory, according to the research, with UK bonds producing returns of 8% and overseas bonds giving twice as high returns, benefiting from the relative weakening of the sterling against the euro and the US dollar.

As a response to the recent institutional investment review by Paul Myners, WM has this year also published figures for a category called other investments, which comprises venture capital and private equity assets.
The category returned 32.5% on average last year and has outperformed equities over the 10-year period, according to the research. The range of results, however, for these assets is very wide – almost a 100% difference between the best and worst performers.

Also for the first time, fund exposure to the domestic equity market fell just below 50% since the research has been conducted. This is despite a rise in investment into the stock markets in total, with exposure at just over 70%, says the company. The rest of Europe is the largest overseas area in UK local authority equity exposure with 7.9% of equity assets on average in the region.

The report also reveals that UK local authorities are concentrating the management of their investments with a handful of money managers, despite there being over 40 firms in the UK market. The research shows that some 60% of all externally managed assets are under the management of only five fund managers, and 83% of externally managed money is in the hands of the largest 10 managers.

“ It appears that while funds are willing to place small pots of specialist money with smaller or less well established managers, when it comes to finding a home for the core investments the range of managers remains a tightly defined pool,” says Thrumble.

The research for the year contains investment information from 93 local authority funds valued at £83bn.