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The new millennium: you're welcome to it

The first year of the new millennium and, well, what a stinker for pension funds!
Just when the seemingly endless bull run had given the impression that gravity had no effect on investment returns, it was back to earth with a bump.
For this month’s ‘Off The Record’, we asked you to reflect on 2000 and tell us your thoughts on the year just gone and the prospects for the one ahead.
Incredibly, less than 1% of you recorded above expectation returns for 2000. We can only hope that the new millennium has started as it doesn’t mean to go on.
Half of the responding funds say that the year has come in under par with returns below their predictions. As one manager notes: “We expected more modest returns than in previous years, but nevertheless returns have been poorer than expected from equities.”
Many blamed poor overall levels of stock markets for their underperformance, alongside currency fluctuations, with one manager lamenting a completely flat year: “The return is around zero on our portfolios.”
Nonetheless, the other half of responding pensions funds appear to have foreseen a tough year and revised estimations accordingly. Disappointed, yes, but not so surprised by the downturn.
Budgets for scheme costs though have posed few problems for managers, with nigh on 100% saying they have met their requirements for 2000 and only a handful noting that they had exceeded their financial quotas.
One manager points out that this had been due to a management rethink: “We switched some of the portfolio from external to internal management, which we hope will result in the continuing good relative performance of recent years.”
When asked what had been the most pleasant surprise for the fund in 2000, the variety of responses is illuminating – ranging from good returns on lesser-spotted securities, such as real estate, emerging market debt and commodities, through the appreciation of the pound and dollar and on to the recovery of old economy stocks.
The most unpleasant shocks came out in a slightly more uniform fashion, with a number of replies reporting disappointment on technology, TMT and dot.com shares and others complaining about the general health of equity markets worldwide: “Poor equity markets, a sharp decline in the euro dampening European equity markets and the return on emerging markets investments,” read the litany of this year’s flops from one manager.
Such a catalogue of disappointment suggests there may be lessons to be learned – and you didn’t hesitate to let us know what the year past had brought home to you.
One fund expressed its surprise over market incredulity, not quite believing “just how long it can take for a market to adjust to reality”.
The heady peak and then speedy unravelling of dot.com shares would seem to suggest that we are still at the whim of bubble economies – despite the historical legacies.
For others the message to take on board was: stick to your guns and use common sense. “What goes up goes down, and vice versa,” points out one respondent. “Never get carried away with anything!” another suggests. “Do not run with the crowd but stick to your long-term diversification strategy,” opines another.
Some responses carry undertones of fingers burnt at the whim of market trends: “stick with value,” says one, “don’t count on past trends,” adds another.
One fund posits the theory that the lesson to learn should be a wholesale change in the investment curriculum: “There is a need for more opportunistic styles of investment, style rotation and for the business cycle to be linked to investment.”
Only a handful took up our suggestion of telling us your new year’s resolution for the fund. We can only assume that pension fund management involves year-round resolve!
One who did declares: “My new year’s resolution for the fund is to change the benefit structure and probably the way of funding.”
Another seems to be atoning for past oversights: “My resolution is that currency is a separate asset class and should be considered at the strategic level of decision making.”
Having battened down the hatches in 2000, pension funds are more bullish about their prospects for the coming year.
Seventy three per cent believe that overall returns for 2001 should top this year’s levels, although confidence is not entirely exuberant: “Yes, we think they will be higher but we are not expecting a return to the highs of recent years.”
Others predict a rise of between 5 and 20% with many pointing to more favourable scenarios if interest rates fall.
One manager sees brass in the muck of the current market: “Valuations are becoming more attractive and the market only looks to the bad news and ignores the good news still available, which hopefully will be heard in 2001.” Anything you want to share with us?
There are a number of dissenters, however. Around 20% of managers feel markets will remain damp for the next 12 months and could come out lower than in 2000. “ We are not bullish for markets at the moment,” comments a fund. Another is a little more specific: “Some market consolidation is necessary and profit expectations will be lower in the US.”
Predicted drivers for the recovery vary from the rehabilitation of stocks and interest rate falls to the macro political and economic, with one manager commenting that much will hinge on the “political stability or credibility of the new US administration”. Another notes the continuing Israeli/ Palestinian crisis and its effects on oil prices as a crucial factor going forward.
Consequently, the majority of funds (64%) say they are changing their asset allocation strategies to take advantage of the mooted recovery. A third of managers say they will up their equity quotas, “if possible to 100%,” says one. The same number say they will also up alternative investments. Just under 30% of funds affirm that fixed-interest portions will be reduced and 27% say they will do the same for real estate.
In terms of challenges for the coming year, there appear to be many. Most run along the lines of increased competition in the investment management industry – perhaps not so much of a challenge for pension funds themselves.
Responses point to mergers of plan sponsors, new benefits structures, or “new laws allowing more generous early retirement”.
A number of funds cite rises in liabilities due to company wage increases as a definite preoccupation: “As a final salary scheme, possible proposals to increase current salaries would have a significant impact on the past service liability,” says one.
One respondent worries about a move into unfamiliar investment waters: “One challenge is our performance target. We are entering alternative investment classes and without the pitfalls we want to achieve the growth.”
Reactions are similar when we ask about the major issues facing pension funds and investment managers in your home country. Most point to the broader global focus in asset allocation and greater competition for the business from cross-border investment management groups as the issues to watch.
On the European front the points of order are unsurprisingly the European directive on supplementary pensions and the strength of the single currency.
OK, so 2000 wasn’t great for pension funds… but in the spirit of the season we’ll re-ignite the debate on which is the true starting year to the new century. Let’s say it is January 1 2001. Welcome to the new millennium again. And good luck!

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