UK funds' performance turns down
UK pension funds recorded only their fifth year of negative performance in 30 years in 2000, producing median returns of –1.4%, according to figures from performance measurement group CAPS. Despite the downturn, however, real returns over the five-year period ending December 31, 2000, continue to be positive at 7.1% per annum relative to earnings and 9.1% per annum relative to retail prices.
And, although returns were negative last year, UK active pension fund managers did not entirely disgrace themselves, according to the analysis. The CAPS survey noted that there was a significant difference between the outcomes of value and growth strategies, with high yielding equities (value) returning 10.5% over the year and low yielding (growth ) equities returning 19.5% – reversing the pattern of the previous two years.
Within equity markets there were violent swings in fortune between industry sectors, with 1999’s star performers telecoms and technology stocks plunging into minus figures returning -37.7% and –44.1% respectively. The best performing sectors were tobacco (56.9%) and personal care and household products (55.3%).
Property was the best performing asset class last year, while both European and UK bonds also gave high returns. Europe was the only equity market to achieve positive returns for pension funds last year, with a median of 4.7%, compared to an index return of 1.5%.
More than half of UK pension funds have now adopted their own benchmarks and follow a scheme specific investment policy, according to analysis by CAPS. By the close of 2000, 57% of schemes had implemented a tailored benchmark for the fund compared with 45% in 1999.
Alan Wilcock, research and development manager at CAPS, notes that funds with benchmarks actually fared relatively well in comparison last year, with 59% outperforming their targets by an average of 1.6%. “The pension funds that set their benchmarks last year have tended to allocate more to overseas equities than those who set up benchmarks earlier,” he says.
Until last year, 70% of equity allocation had been invested in UK equities and 30% overseas. Today, 34% is allocated to foreign shares. Within the overseas equity allocation limits, fund benchmarks set in 2000 allow for 40% to be invested in European shares, 28% in US stocks and some 30% in Japanese and Pacific equities with an emphasis on Japan.
“This is substantially different to how discretionary fund managers have set their investments – they would have a much higher European allocation and a lower US one,” Wilcock adds. Scheme size does not seem to matter when it comes to whether a benchmark is adopted, although investment strategies do change according to fund size, CAPS claims.
The research also found out that the bigger a fund is, the more likely it is to have a passive portfolio: more than half (55%) of schemes with over £500m (e790m) in assets have passive briefs. Funds with less than £100m of assets rarely have passive investments, but those who do, seem to have most of their cash under passive management.