UBS: Major Pension Asset Rebalancing Ahead

Strategists foresee US defined benefit funds offloading between $35 billion and $41 billion in stocks before the quarter's end, but purchasing an estimated $19 to $22 billion of additional fixed income products.

(September 23, 2013) — UBS investment research has forecasted a significant flow of US defined benefit (DB) pension capital from equities into bonds by the close of the third quarter (September 30).

Strategists Boris Rjavinski and Matthias Rusinski projected between $35 billion and $41 billion in public equity sales, coupled with fixed income buys of $19 billion to $22 billion.

Strong stock market returns and lackluster performances from US investment-grade fixed income for the month and quarter-to-date drove these projections.

Domestic equities skyrocketed with a small cap index in the lead with 10% rise this quarter so far. International equities showed strong returns as well and an emerging market equities index increased 8.48% for the quarter-to-date.

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Bond performance, on the other hand, was relatively flat. The mainstream index cited by UBS increased less than 0.5%, UBS found.

UBS concluded that inflows to fixed income could help US government bonds. With the Federal Reserve’s ‘tapering’ on the table, heavy buys by pension funds could slow down a considerable exit of capital from bonds and lower the Treasury yield.

While Treasury auctions of $97 billion total this week may slow down pension funds’ immediate demand for bonds, it is projected that pensions’ longer-duration contracts would allow for a gradual shift in assets over a longer period of time.

The research also found that corporate plans’ trend towards de-risking strategies and liability-driven investments will drive further inflows to fixed income.

Historical data showed that 2013 is the third year in a row when third quarter pension rebalancing estimates were significant.

Corporate pension funds’ demand for longer bonds are expected to grow and see major net new contributions in 2013.

However, UBS advised pension funds to weigh rising bonds yields with a potential of drying up of liquidity when considering further corporate and government bonds purchases.

Related content: What Now for Fixed Income?

Preqin found American hedge funds are recovering and growing faster than their global counterparts, managing 65% of the industry’s global capital.

(September 23, 2013) — US-based hedge funds have outperformed the global benchmark so far this year, seeing an increase in assets of over $150 billion, according to Preqin.

European funds, on the other hand, experienced a rise of only $33 billion in assets in 2013.

The research found that US hedge funds recovered faster and grew stronger than other regions, managing over $508 billion in assets, or 65% of capital handled by hedge funds globally.

Examining data from more than 2,700 US institutional investors and more than 3,200 fund managers, Preqin concluded that US hedge funds produced a net return of 13.54%, much higher than the global average return of 11.09%.

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Amy Bensted, head of hedge fund products for Preqin, said the US has significantly grown as the center of the hedge fund industry, thanks to American institutional investors, despite the funds struggling across the board.

“US-based institutional investors represent a vital source of capital for hedge fund managers,” she said. “These investors recognize the value that hedge funds can add to their portfolio, and have begun to allocate significant sums to hedge funds to complement their traditional equity and fixed income portfolios.”

The data supported Bensted’s theory. Some 73%, or $1.74 trillion, of total hedge fund industry assets under management was attributable to US investors.

Also, the study found that US hedge funds had fared better than global funds on a three and five-year annualized basis, contributing to the consistent and growing presence in the industry.

Preqin stated that 95% of all US hedge funds were based in 10 states: New York, California, Connecticut, Massachusetts, Illinois, Texas, New jersey, Minnesota, Pennsylvania, and Florida.

With $838 billion in assets under management, or 40% of total US funds, New York was clearly the largest “leading center” for hedge funds, research found. New York-based hedge funds produced a 7.56% net return in 2013 so far.

The full report can be found here.