EUROPE - Irish pension funds have proved go be more resilient to recent market turmoil than anticipated, research has revealed.
However, focus elsewhere in Europe may be turning to lower correlation investment strategies.
Figures presented by the Irish unit of Hewitt Associates suggest that funding liabilities still look reasonably secure for local funds despite experiencing the equivalent of a 10% reduction in their funding levels over the last two weeks.
Irish pension funds are now likely to be 110% funded on average, thanks to earlier equity market growth. However, this is a drop from an average of 120%.
Deborah Reidy, investment consultant at Hewitt, said the average Irish managed pension fund was down 2% in the almost eight months to August 20, and the yield on long bonds was down 2.7% to that date.
Yet this is still a more resilient position for pension funds to be in compared with December 2005 when average funding was at around 100%, Ryder noted.
"Market movements contributed to a healthy 30% increase in the funding levels by mid June," she said. "The sub-prime debacle caused markets to fall sharply, clawing back some of the funding increase, but this typical fund remains 20% better off than it was less than two years ago, on a funding basis."
With markets still appearing turbulent - and other investments consultants arguing it may be too early to assess the need to change asset allocation strategies - several asset management houses have been quick to highlight investment strategies that are considered to be uncorrelated to or avoiding current market volatility.
Asset manager MPC Investors said it had seen increased interest from investors in recent weeks in absolute returns despite earlier criticism of the investment returns they generate compared with traditional alpha.
MPC Investors' head of marketing Dan Mannix said that while it is had seen improvements to its convertible bonds investment performance - tapping into the use of derivatives to avoid sub-prime market exposure and fluctuating bond yields - this appeared to have had a knock-on effect in a rise in demand for absolute returns.
"Institutional investors, particularly in Switzerland and northern Europe, are using convertible bonds in their portfolios because they provide an element of diversification" said Mannix. "They are typically using them as conservative equity exposure, although they are legally bonds, because they believe equities are a long-term risk."
He added: "There has also been some significant focus on absolute return strategies. There has been a plethora of absolute return funds over recent years and while many companies have seen questions about their performance, we have seen increased interest over the last couple of weeks, in part because our performance has remained good as investments are hedged against convertible bonds."
Elsewhere, PIMCO, known particularly for its presence in the fixed income market, is suggesting event-linked bonds might be an appropriate diversification tool even though there may be higher yields available in the corporate bonds market.
PIMCO managing director John Brynjolfsson noted in a Q&A on the market that event-driven bond returns have been "essentially unaffected" by equity and corporate bond activity because the pricing and investment decisions in this market are made under different criteria.
"The valuation process for financial market instruments embeds uncertainty for corporate governance, unexpected rating changes, correlations with other financial market asset classes and other factors that are distinctly separate from the risk forecasting process associated with event-linked bonds," he said.
PIMCO has presented research suggesting there is no direct correlation between ‘man-made' market activity and that generated by disasters.
"We looked at the 10 largest catastrophic events that have occurred in the US and we looked at the stock market returns starting before the event and extending 30 days after the event," said Brynjolfsson. "Oddly enough, there was a slight drift upward in the stock market, meaning that the average move in the stock market during a period that included a super-catastrophic event was for the stock market to rally. I say slight to highlight the fact that, statistically, the correlation is insignificant."
Marik Siwicki, head of consultant relations at Gartmore, has also suggested the shifting value of bonds may make the ability to withdraw gains through LDI strategies more appealing.
"If bond yields have widened, it might make LDI more attractive," said Siwicki. "If bond yields are higher, it may be appropriate to ask whether now is a good time to lock in gains."