UK – The roughly 55%-45% split between UK and overseas equities in many pension fund investment portfolios could be on the road to complete reversal, according to Mellon Analytical Solutions.

Publications and statistics manager Daniel Hall told IPE the decline in UK equity allocation and increasing allocation in overseas equities “showed no sign of slowing down”.

He added that a need to diversify risk was among the main factors influencing increased allocation by schemes to overseas equities.

According to MAS’s ‘UK Pension Fund Analysis 2005’ presented in London today, allocation to UK equities has declined “steeply” over the last six years to 35.7% - the lowest recorded level since MAS records began in the mid 1970s.

Meanwhile, overseas equity allocation has simultaneously been on the rise, and now stands at 28.8% - “an all time high”, according to Hall.

US and Japanese equities were the main sectors to benefit from this increase, said MAS. US weightings rose by 1.2%, to 9.7%, while Japanese equities rose by 0.5% to 5.1%.

But European equity weightings fell from 9.7% to 9.2% over 2005. This means that for the first time since 1988, US equity weightings exceeded European weightings.

Reduced exposure by schemes to UK equities also meant that equity weightings overall fell for the sixth consecutive year. They fell from 66.5% to 64.5%.

As a result, exposure to bonds, index-linked gilts and property rose correspondingly, said MAS.

According to other MAS results, 59% of UK schemes beat their investment performance benchmark in 2005.

Also, approximately one in six pension funds with a fixed percentage outperformance target achieved that target over the objective period (three to five years) to 31 December 2005, said a statement.

MAS added: “The majority of pension funds use specialist asset managers in key asset classes and our research shows that, over rolling three-year periods, managers were, on average, able to beat the relevant index by +1% p.a. around 40% of the time.”

According to Hall, “While many funds can achieve the required outperformance targets in individual asset classes, it proves to be much more difficult to achieve the same result for the overall fund.”