UK – Watson Wyatt says that its UK pension fund clients awarded more than double the number of absolute return mandates in 2003 than in 2002.
The firm said its clients awarded 16 such mandates last year, compared to seven in 2002 and 10 in 2001.
The data comes as the firm said the number of its clients awarding balanced mandates in 2003 fell to 19 from 33 in 2002.
“Poor equity markets have squeezed pension fund balance sheets, leaving many under funded,” said Nick Watts, Watson’s head of European investment consulting.
“In order to make their assets work harder and rectify this position, many funds are moving a proportion of their assets away from benchmark-sensitive instruments and making higher allocations to absolute return products, notably to funds of hedge funds and 10-year mandates.”
And the firm added that the trend towards absolute return mandates “accelerated significantly” at the end of 2003 and the start of 2004.
It said its clients have awarded 11 10-year mandates to investment managers since October 2003. Watson said it “introduced the concept” of 10-year mandates.
“These are some of the new ideas that are being implemented more quickly as funds, plan sponsors and investment managers see the benefits of absolute return investing, both short- and longer-term,” Watts said.
The firm has also seen a rise in other asset classes such as high yield and emerging market debt, long/short equity and structured programmes.
Said Watts: “As governance budgets have increased and risk is viewed more holistically across pension plan and sponsor, funds are committing their assets, both bonds and equities, to more innovative, longer-term products.”
Watson advises more than half of the companies in the benchmark FTSE100 index.
It added its clients awarded 57 billion dollars worth of assets globally in 2003 – 27% up on 2002. In 2003 there were 359 selections compared with 462 in 2002.
The trend away from balanced to specialised management in the UK was confirmed in 2003 with the number of mandates awarded by Watson Wyatt’s clients to multi-asset managers dropping 41 percent from 33 to 19. The main beneficiaries of this trend were enhanced indexation and alternatives managers.
Last week Watson released research which found that pension administration cost an average 90 pounds per member.