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IPE special report May 2018

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Property, infrastructure looking more attractive in wake of QE2, experts say

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  • Property, infrastructure looking more attractive in wake of QE2, experts say

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UK - Pension funds in the UK should consider property and infrastructure as alternative asset classes in the wake of the Bank of England's new £75bn (€87bn) quantitative easing package, according to Aon Hewitt and the Pension Insurance Corporation.

Yesterday's announcement led to calls from the National Association of Pension Funds for an urgent meeting with the Pensions Regulator amid concerns that falling gilt yields would further drive up scheme liabilities.

Asked what alternative asset classes pension funds should consider instead of UK bonds, Colin Robertson, global head of asset allocation at Aon Hewitt, highlighted property.

"The rental outlook is questionable, but, even if you allow for significant falls in rental income, the actual yield is very attractive, and it has a link to inflation," he told IPE. "That's a very desirable asset class compared with, say, index-linked gilts or gilts generally."

Meanwhile, Mark Gull, co-head of asset liability management at the Pension Insurance Corporation, pointed toward assets similar to bonds, rather than investing in non-sterling denominated fixed income.

"It would be great if there were a raft of infrastructure bonds coming off now that they could invest in," he said. "That will increasingly be a focus of pension funds."

Gull admitted that, while there was a correlation between sterling and euro-zone bonds, they did not match a scheme's liability perfectly and that infrastructure instruments were preferable.

Roberson, meanwhile, dismissed increased exposure to the German Bund as "especially unattractive" at a time when it was expected to underwrite the expanded European Financial Stability Facility, leading to an increased issuance of debt from the country's Finanzagentur.

"Therefore, the quality of the Bund will go toward the quality of the whole of Europe - considerably down from here," he said. "The outlook for the Bund is highly unattractive and certainly not what somebody would want to buy in place of gilts."

Gull added that, while a second round of quantitative easing was not a surprise to the market, its timing was, as was the fact that the asset purchase would exceed £50bn.

However, he was unsure if the central bank should have given earlier indications that the new stimulus package was due to be announced.

"That's a difficult one," he said. "They get more impact like that - surprising the market is sometimes what central banks like to do."

Meanwhile, Punter Southall's Danny Vassiliades highlighted that it was uncertain whether QE2 would focus entirely on gilts.

"The chancellor's letter to the governor of the Bank of England outlines that a maximum of £50bn may be used to purchase eligible private sector assets," he noted.

He warned that pension schemes would end up paying a "QE premium", as they were faced with both increasing inflation expectations and falling yields.

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