UK Balanced Funds Have First Positive Year Since 1999, Says Russell/Mellon CAPS

UK Pooled Balanced funds have recorded their first positive calendar year performance since 1999, with a median return for 2003 of 18.1%. Daniel Hall, Russell Mellon CAPS' Publications and Statistics Manager said "2003's performance has helped pooled funds claw back

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UK Pooled Balanced funds have recorded their first positive calendar year performance since 1999, with a median return for 2003 of 18.1%.

Daniel Hall, Russell/Mellon CAPS’ Publications and Statistics Manager said: “2003’s performance has helped pooled funds claw back a significant proportion of the money lost since the start of the millennium. Based on net median performance, a fund worth ?100m at the end of 1999 would have lost around ?30m by the end of 2002. By the end of 2003 it would have regained nearly half that amount.”

The strong performance in 2003 was driven by double-digit positive returns in each of the major equity markets. The index return on UK Equities was 20.9%, while Overseas Equities returned 20.8%. Emerging Markets (40.1%), Pacific ex Japan (31.0%) and Europe ex UK (29.3%) provided the best returns while Japanese and North American Equities returned 22.8% and 16.1% respectively. The fall of the US dollar against the pound over the year significantly reduced North American Equity returns to the UK investor.

Property (8.5%), Index-Linked (6.6%), Cash (3.5%), Overseas Bonds (3.0%), and UK Bonds (2.1%) also provided positive returns.

Active UK Equity managers marginally underperformed in 2003 with a median return, after fees, of 20.8% against the FTSE All-Share return of 20.9%. Over three years however, these funds did better, returning -6.4% p.a. against -6.8% p.a.

Over five years, the outperformance was more marked with a median return of -0.3% p.a. against an index of -1.1% p.a. Over 10 years however, the median performance of 6.0% p.a. was 0.1% p.a. behind the index.

UK Smaller Companies managers showed more consistency, having outperformed the FTSE Small Cap index over the quarter, 12 months, three, five and 10 years. Over 10 years to 31 December 2003, the outperformance margin was 2.3% p.a. with a median return of 8.1% p.a. against the index of 5.8% p.a.

Within the UK Equity market, small cap stocks produced the best return of 39.7% over the year. The mid cap stocks of the FTSE 250 also performed well returning 38.9%, while the FTSE 100 stocks provided the poorest performance of 17.9%.

Information Technology was the best performing of the UK Equity economic sectors in 2003, returning 65.8%. Poor returns in 2001 and 2002 however, meant that this sector was the poorest performer over three years, with a return of -42.6% p.a. Utilities, which produced the best return in 2002, gave the worst return in 2003 of 6.9%.

For the fourth year running, higher yield (value) stocks outperformed lower yield (growth) stocks, returning 20.8% against 19.8%. Consequently value stocks are significantly ahead over the medium term. Over three years, value stocks achieved a return of -0.4% p.a. against -15.0% p.a. for growth stocks, while over five years, the corresponding returns were 5.0% p.a. and -8.9% p.a.

Over 2003 the average overseas equity weighting in Balanced pooled funds rose from 25.7% to 30.1%. This represents a new high since our records began in 1989. While good relative performance accounted for some of this increase, managers moving money into overseas equities was the predominant factor. UK Equity weightings also rose, by 0.3% to 53.1%. This increase would have been more marked if managers had not strategically moved money out of the sector.

As the average weightings in equities rose over the year, holdings in fixed income and cash correspondingly fell. A combination of poor relative performance and manager movements meant that the average allocation to UK Bonds fell by 2.3% to 8.0% and Overseas Bonds by 1.1% to 3.9%. Cash fell from 4.9% to 3.8% over 2003.

Property weightings have fallen fairly steadily over the last 10 years. At the end of 2003 the average Property weight was 0.8% compared with 1.8% at 31 December 1993.

The Pooled Pension Fund Database covers the largest and most representative sample available to UK pension funds’ trustees. We currently cover 81 separate asset managers who manage over ?254 billion in pooled funds, both balanced and specialist.