UK pension funds “net buyers of equities”

UK – UK pension funds were – perhaps surprisingly - net buyers of equities and net sellers of bonds in 2002, according to data from Russell/Mellon CAPS.

Its data for UK segregated pension funds in 2002 show that, although asset distributions to UK equities fell to 43.4% from 47.4% in 2001, the decrease was a result of poor market performance, and funds were actually buying into the asset class.

Similarly with bonds, fund average distribution to this asset class may have reached a 10-year high of 20.3% from 17.7% the previous year, but this figure would have been higher still had funds not been net sellers of bonds in 2002.

The reason, believes Alan Wilcock, research and development director for Russell/Mellon CAPS, is that funds will buy and sell assets in order to keep their asset distribution in line with their own rules.

For example a fund may wish to hold 60% of its assets in equities, allowing a range of 55% to 65% for market movements. But if equities perform badly the percentage may well fall below 55% and schemes will be forced to buy equities to return above 55%.

On the other hand, if equities perform well, a fund may have to sell them to keep the distribution within the 65% mark.

The same applies for bonds. Bond market performance in 2002 resulted in bonds accounting of a higher percentage of funds’ overall assets, forcing many to sell – although Russell/Mellon CAPS says that investments into corporate bonds did increase, but did not compensate for the selling of UK government bonds.

Russell/Mellon CAPS reports that the weighted average return for UK pension funds in 2002 was –12.9%, slightly more than WM Co.’s findings last week which put returns at –13.9%.

UK pension funds have now failed to produce a positive real rate of return over the last three and five-year periods. Data from 1,500 pension schemes with a total market value in excess of 300 billion pounds was analysed by Russell/Mellon CAPS.

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