The weighted average return for UK pension funds in 2004 was 10.4%, confirming early estimates, according to Russell/Mellon UK Pension Fund Analysis 2004. This double-digit return, coupled with a strong performance in 2003, puts pension funds just back into positive territory over five years, with a weighted average return of 0.1% p.a. As a result, pension funds have effectively wiped out the investment losses suffered in the first three years of the decade.
The fund median for 2004 was 10.5%, indicating that larger pension funds produced broadly similar performance to smaller pension funds over the year. However, the analysis shows that small and large schemes had different investment strategies. While the performance of smaller schemes benefited from higher equity weightings and lower fixed interest and index-linked weightings, larger funds benefited from higher weightings in property.
Active UK Equity managers outperform over longer periods.
The median discretionary return for UK Equities was 12.8% in 2004, which matched the FTSE All-Share index. This represents a fifth consecutive year in which UK Equity managers have either matched, or beaten, the index. Consequently UK Equity managers have beaten the index over three, five and 10 years to 31 December 2004. Active managers also beat the index in UK and Overseas Bonds, UK Index-Linked Gilts, Cash and Property in 2004.
The Overseas Equity discretionary median was 9.9% over the year, compared with the FTSE-AW All-World ex UK index of 7.6%. This outperformance can largely be attributed to managers’ overweight positions in Europe and Pacific ex Japan and underweight positions in the US.
Funds adopt new mandates.
Over the last 16 years pension funds have been increasingly adopting new portfolio mandates within their fund structures. At the end of 1989, just less than one in 10 portfolios had been newly appointed during the year. In 2004 however, this had risen to around one in five. This increase in activity has been influenced by a number of factors. Daniel Hall, Russell/Mellon’s Publications and Statistics Manager said, “Since the end of the 1980s pension funds have increasingly adopted scheme-specific benchmarks in place of universe comparisons. This has led to a move away from Balanced and Multi-Asset based portfolio structures and towards specialist structures with a greater number of mandates.”
UK Equity weightings at an all time low.
UK pension fund weightings in UK Equities fell for the fifth consecutive year in 2004. The weighting of 39.0% at the end of December 2004 represented another all time, year-end low. At the same time, weightings in Overseas Equities continued to rise from 26.7% to 27.5%, an all time, year-end high.
Weightings in UK Bonds rose from 19.4% to 21.2% in 2004. By contrast, funds further reduced their weightings in Overseas Bonds from 1.1% to 0.7%. Within the UK, corporate bonds continued to increase in popularity with pension funds such that, by the end of 2004, they had overtaken Gilts as an asset class. At the end of 2004, pension funds held on average 10.4% of their assets in Gilts and 10.8% in Non-Gilts (corporate bonds).
At the end of 2004, Russell/Mellon measured the performance of 672 UK pension funds, representative of 1,885 separate manager portfolios, with a total market value of £178 billion.