Pension funds strive to diversify risk

By Staff
|
Google Oneindia News

LONDON, Apr 11 (Reuters) British pension funds have reduced their exposure to stock markets, but still have the greatest equity allocations in Europe, a survey shows.

The average pension fund in the UK has 61 per cent of its assets in equities -- the highest in Europe and compared to lows of 24 percent and 26 percent in Germany and France respectively, according to Mercer Investment Consulting.

Pension funds in the Netherlands and Switzerland also have comparatively few assets invested in the stock market -- with the average just 35 percent in both countries -- followed by Spain at 36 percent.

Funds in these countries have correspondingly higher allocations to bonds.

However, the poll of 650 European pension funds, with assets of 423 billion euros (288 billion pounds), reveals that fund managers in Britain, as well as elsewhere in Europe, are increasingly focusing on controlling investment risk.

Many pension funds are looking to pursue a wider range of asset strategies to diversify their portfolios, the survey shows, and British pension funds have reduced their equity allocations from 62 percent last year and 68 per cent in 2003.

Property is by far the most popular alternative to equities and bonds.

The proportion of British funds investing in this asset class has dropped by 5 percent to 20 percent, but a larger proportion of continental European funds continue to invest in property.

European Director of Consulting at Mercer, Ralph Frank said: ''Historically, pension funds have invested in domestic property markets, but now they are starting to look further afield to international markets, in an attempt to enhance returns.

''But in doing so, they need to be aware of how to control their currency risk.'' Interest in active currency management, hedge funds and private equity is also on the up, as funds seek to diversify.

Some 8 percent of British pension funds and 4 percent of those in continental Europe and Ireland are using active currency management, while 6 percent of UK funds and 9 percent of continental European and Irish funds invest in hedge funds.

Investment in private equity is also greater in continental Europe and Ireland than in Britain -- with 7 percent of funds investing in this area, up from 4 percent last year, compared to 3 percent in the UK.

However, a number of British pension funds are considering introducing a form of cash-flow matching or liability-driven investment (LDI) strategy this year, with 10 percent using swap overlays and further 10 percent using fund-specific benchmarks for bond mandates.

Andrew Kirton, European business head of Mercer, said LDI techniques are gaining interest in the UK, having become mainstream in the Netherlands.

''In both markets, the desire by fiduciaries to exercise more control over the impact pension funds can have on company finances is one of the driving forces behind this development,'' he added.

Reuters AGL MIR RN0829

For Daily Alerts
Get Instant News Updates
Enable
x
Notification Settings X
Time Settings
Done
Clear Notification X
Do you want to clear all the notifications from your inbox?
Settings X
X