Hannah Brenton looks at where pension funds will invest over the coming year, and why.
In their annual outlook briefings, asset managers predict equities will perform well over 2013, with particularly attractive valuations in European and emerging markets.
Not following rush to equities
They warn of a looming bubble in the “safe haven” government bond markets, while arguing investment grade corporate bonds are unlikely to replicate their 2012 performance.
Yet for UK pension funds, do these predictions have any value? Since the financial crisis, schemes have scaled back their exposure to equities while increasing their government and corporate bond allocations to better match their liabilities.
The Pension Regulator’s Purple Book, published in November last year, revealed UK pension schemes owned more fixed income assets than equities for the first time.
Could 2013 see UK schemes reverse the trend and put more in equities as an engine for growth? Anyone familiar with the industry would say this is unlikely. Yet if schemes are set to ignore the overall picture for asset classes, what will they invest in? And what trends are guiding their decisions?
Experts predict defined benefit schemes will continue to grapple with risk over the coming year. Aon Hewitt partner John Belgrove expects a continuation of the long-term trend to de-risk pension schemes, despite record low gilt yields.
“De-risking is likely to continue, so notwithstanding that gilt yields are very low and everyone recognises that, the imperative for pension schemes to keep managing down their risk is very strong, and I think that will continue through 2013. Even though gilt yields are very expensive, they will still be sourcing inflation opportunities and de-risking opportunities,” he says.
Belgrove argues more schemes will use leverage in their de-risking strategies to free up capital elsewhere.
“They are effectively accessing the risk mitigation that they want but in a leveraged way that frees up capital to invest in other ideas, and you have to invest for growth because these schemes are in deficit,” he says. “There are some big gaps to make up and they are maturing fast, so the timelines in which to solve the problem are not getting longer, they are getting shorter.”
BlackRock Solutions fiduciary management investment team, head of investments, Richard Urwin agrees. He says: “I think for most DB schemes the name of the game is to try to get to a position where your funding position is much stronger, where you can de-risk the portfolio and allow the finance director to sleep at night.”
Yet one area where schemes are likely to take on more risk is within their fixed income portfolios. The search for yield has dominated allocations further down the credit spectrum in 2012 and looks set to continue this year.
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