Corporate Bonds and US Equities Feel Investors’ Mood Swings

(November 19, 2012) — Investors have moved out of United States equities and corporate bonds of all but the highest quality, as budget questions linger in the world’s largest economy and poor data squeezes Europe and Japan.

Flows out of US equity funds hit $7 billion last week, according to data monitor EPFR, as the dust settled after the country’s election and the so-called Fiscal Cliff came looming back into view.

Overall, redemptions from all equity funds around the world hit their highest level since the week before US Federal Reserve Chairman Ben Bernanke announced the nation’s third round of Quantitative Easing in September.

The only equity funds to receive a boost last week were those investing in Japanese markets, where investors were betting on a surge following the announcement of a general election in an attempt to beat a budget-decision impasse, EPFR said.

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High yield bonds, which had received a shot to the arm earlier in the month, saw mass redemptions from US investors who were wary of taking excessive risk. European investors, on the other hand, ploughed more into the asset class as some newly issued strong government bonds in the region saw yields turn negative this month.

However, over the longer term, research from investment consultant bfinance showed investors are set to move away from developed market economies all the way up the risk scale.

A survey of institutional investors in North America, Europe and the Middle East by the firm showed over the next three years, investors planned to reduce exposure to developed market equities and sovereign bonds to the benefit of emerging market equities, credit, real assets, and alternatives.

Emmanuel Léchère, head of the Market Intelligence Group at bfinance, said: “Beyond diversification, the challenge for many investors is how to best understand and reintroduce risk in a calibrated fashion that recognises different types of risk tailored to different investor profiles, from the least risky to the most risky: investment grade credit, high yield, emerging market debt and finally, equities and alternatives.”

The consultants also found investors were pushing further into alternative assets, but shying away from hedge fund strategies, at least for the short-to-medium term. A net 7% of investors said they would decrease their allocation to this asset class over the next three years.

(November 16, 2012) — A proposed merger of local authority pension funds in the United Kingdom’s capital took a step closer to reality this week, as London’s top politicians agreed to explore the project further.

A meeting of the Leaders’ Committee, the main decision-making body in the capital, and representatives from the Society of London Treasurers was held on Tuesday to receive an assessment of the proposal by consultants at PriceWaterhouseCoopers.

The move, which was proposed in March this year, could see the 34 London Boroughs pool their assets, liabilities, and administrative functions to take advantage of economies of scale and improved investment opportunities. Some of the boroughs’ pension funds have less than £500 million.

Mike Taylor, CEO of the London Pension Funds Authority and champion of the merger proposal, told aiCIO that he considered the decision made at the meeting to be a success for the cause.

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“I am very pleased,” said Taylor. “The most senior politicians in London have agreed to explore the proposals and will take them forward. It will take some time, but if we are successful, I think we are looking at 2016 for the merger to begin.”

Taylor said the introduction of a new Local Government Pension Scheme (LGPS) in 2014 would mean that even if agreed, work on a merger could not start any earlier.

The assessment of the proposals by PWC said there were more benefits than drawbacks to merge the capital’s pension funds.

It said: “We consider that there would be significant benefits from the London LGPS Funds working more closely together on both investment and administration, with greater savings expected from investment.”

The consultants said the merger would not be without challenges, but explained in a 45 page document the various options available should the project be agreed.

The meeting coincided with a report from Cass Business School that said there were fundamental flaws in the investment governance of the 34 pension funds in the capital, which threatened their sustainability without a tax-payer bailout.

Professor David Blake, former aiCIO columnist and author of the report, said: “The London schemes are particularly at risk because they are so small, with funds worth less than £1 billion at the last valuation, and less than £0.5 billion in 50% of cases. This denies them the opportunities conferred by scale, which is enjoyed by many of the non-London schemes.”