European pension funds enjoyed a total average return of 11 per cent in 2004, partly on the back of a relatively strong 5.6 per cent lift in the final quarter of the year. Or so predicts the WM Company, the European performance measurement arm of State Street.
WM says concerns about the Madrid bombing, steeply rising commodity prices and US deficits initially shook investor confidence in equities, but as the year wore on these factors were countered by improved economic growth and better news on corporate profitability. Overall, says WM, with two years of steady growth behind them, pension funds have recovered most of the losses they sustained during the savage bear market between 2000 and 2002.
The 2004 result is a good outcome, but it needs to be put in perspective, says Graham Wood, a Senior Consultant at WM. Low interest rates, improvements in life expectancy and modest inflation continue to cause the general deterioration of funding positions. Recovery will require more years of similar or better investment returns and/or higher employer contributions.
For the year, UK equities finished strongly to post a total return of 12.7 percent, while overseas equities in aggregate also rose over 10 percent in sterling terms. Europe ex-UK (13.7 percent) and Pacific ex-Japan (nearly 17 percent) equities did well, while Japanese equity performance recovered at the end of the year to finish at 8.7 percent. North American equities gained around 12 percent in local currency terms, but the depreciation of the dollar which fell by 7 percent against sterling in 2004 meant that sterling investors netted less than 4 percent for the year.
Despite rising short-term interest rates, UK bonds and Index Linked performed relatively well, with 2004 returns around 7 to 8 percent. Overseas bond returns were again affected by the weakness of the dollar, and closed for the year up just under 5 percent. Property continued its extended run of strong results to finish the year up approximately 16.6 percent.