Study: UK Pensions Slash Equities

(April 21, 2011) — UK pension funds have migrated into bonds from equities over the past decade, a study by BNY Mellon Asset Servicing reveals.

“In the UK and across the globe, pension demand for bonds will be rising over the next decade,” Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, told aiCIO. “The financial crisis exacerbated this long-term rise to more conservative investments for protection,” he said.

According to the bank’s research, which surveyed 185 UK pensions with a total market value of $157 billion (£95 billion), pension scheme investment into UK equities has more than halved over the past 10 years, reflecting a broader movement out of equities, with statistics showing global equity investment down from 73.5% to 51.4%.

While UK equity investment accounted for 51% of UK pension portfolios in 2000, it made up just 23.7% last year. The study showed that holdings in US equities fared better, rising from 4.7% to 9.7% over the 10-year period while asset allocation of bonds went up from 16.5% to 26.7%.

BNY Mellon’s results also reflected an increase in emerging market equities, which grew from 0.7% in 2000 to 3.5% at the end of December 2010, and increased 1.1% during 2010, largely as a result of the rising importance of emerging markets to global equity investment.

“During 2010, UK pension funds continued the long-term trend of investing less in equities and more in bonds and inflation linked gilts as well as diversifying their equity holdings more internationally, particularly in emerging markets”, commented Alan Wilcock, performance and risk analytics manager at BNY Mellon Asset Servicing, according to London-based Fundamentals.

The optimism about the future of bonds contrasts with an earlier report by Credit Suisse, which asserted that bond investors should expect less robust returns in the years ahead. London Business School’s Elroy Dimson commented: “We are struck by the volatility of the size, value and momentum effects. Over the long term, all three factors have provided a positive risk premium. But over shorter intervals, these premia can easily go into reverse.”

According to the annual Credit Suisse Global Investment Returns Yearbook 2010, bond investors can’t expect bonds to outperform forever, Paul Marsh, emeritus professor of finance at London Business School, stated. The authors found that bond investors should not expect returns for the next 11 years to be as strong as those of the previous 11 years, largely as a result of rising inflation. While bonds in 19 developed markets worldwide outperformed stocks in the 11-year period ended December 21 by an average annualized 3.2 percentage points, the outperformance of stocks over bonds in the same countries has been by 3.8 percentage points since 1900.