UK Balanced Funds Up 8% In Q3, Says Mellon

Rising equity markets during Q3 allowed balanced pooled funds in the UK to achieve a positive median return for the tenth consecutive quarter. The median return over the quarter was 8.0%, net of fees. Or so say Mellon Analytical Solutions.

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Rising equity markets during Q3 allowed balanced pooled funds in the UK to achieve a positive median return for the tenth consecutive quarter. The median return over the quarter was 8.0%, net of fees. Or so say Mellon Analytical Solutions.

“Continued strong equity performance in Q3 2005 means that Balanced pooled funds have finally broken even over cumulative periods from the start of the decade,” says Daniel Hall, Mellon Analytical Solutions’ Publications and Statistics Manager. “The median return over 5 ľ years, from the start of 2000 to the end of September 2005 was 1.0% p.a.”

As in Q2, positive market returns were achieved across all major asset classes in Q3 2005. UK equities achieved an index return of 8.2%, while Overseas Equities returned 9.2% overall. Property (4.6%) and UK Index-Linked Gilts (1.3%) were the only other sectors to outperform the Cash index of 1.1%. By comparison, UK and Overseas Bonds returned 0.4% and 0.1% respectively.

Japanese Equities (19.9%) and Emerging Market Equities (19.5%) gave the best major overseas market performances, while Pacific ex Japan Equities (11.3%) also performed well.

The dollar rose against sterling over the quarter having a positive impact on North American Equity returns. However, despite this boost, North American Equities still provided the poorest major equity market return of 5.9% in sterling terms. The euro also rose against sterling, enhancing euro bloc returns. Overall, European ex UK Equities returned 9.8% in sterling terms.

Active pooled managers underperformed, relative to the index, in Property and a number of major equity markets, namely UK Smaller Companies, UK Equity, North American Equity and Japanese Equity. However, they matched, or beat, the index in all other sections.

Active UK Equity managers achieved a median return of 7.9% after fees this quarter, which was 0.3% below the FTSE All-Share index of 8.2%. They were also below the index over one, three, five and 10 years to 30 September 2005. Over 10 years the median return for active UK Equity managers was 7.6% p.a. against 8.0% p.a. for the All-Share index.

Within the UK, small and mid cap stocks each achieved the best market cap return over the quarter of 8.7%. By comparison large cap stocks lagged slightly, with a return of 8.1%.

Economic sector returns over the quarter ranged from 17.0% for Resources to 2.4% for Cyclical Services. Resources incorporates Mining and Oil & Gas, while Cyclical Services incorporates General Retailers, Leisure & Hotels and Media & Entertainment.

Cyclical Services also provided the poorest return over the last 12 months of 14.0%. General Industrials provided the best return of 40.3% over the same period.

Lower yield (growth) stocks, outperformed higher yield (value) stocks, over both the quarter (9.8% against 6.9%) and the year (25.2% against 24.6%). Over the longer-term however, value stocks were significantly ahead. Over three years, value stocks returned 20.0% p.a. against 17.6% p.a. These compared with a return of 19.0% for the FTSE All-Share index. Over 10 years to 30 September 2005 value stocks were 8.2% p.a. ahead of growth stocks, with a return of 11.8% p.a. against 3.6% p.a. The FTSE All-Share index returned 8.0% p.a. over the same period.

Balanced pooled fund managers moved money out of UK Equities during Q3 2005 and consequently average weightings in this sector fell by 0.7%, from 50.6% to 49.9%. This is a new low for average UK Equity weightings and the first time, since our records began at the end of 1989, that Balanced funds have held less than half of their assets in UK Equities.

Over the same period, managers moved money into Overseas Equities, in particular Japan, North America and Europe. These manager movements combined with strong relative performance to increase overall Overseas Equity weightings by 1.9%, from 33.2% to 35.1%. This represented another new high for average Overseas Equity weightings.

Japanese Equities saw the biggest single sector asset allocation increase of 1%, from 5.3% to 6.3%. European Equities also saw a significant increase from 12.8% to 13.3%.

Poor relative performance impacted on UK and Overseas Bond weightings over the quarter. UK Bonds fell by 0.4% from 6.7% to 6.3%, while Overseas Bonds fell by 0.6% from 2.4% to 1.8%. In the case of Overseas Bonds, manager movements also contributed to this reduction.

The Pooled Pension Fund Database covers the largest and most representative sample available to UK pension funds’ trustees. We currently cover 77 separate asset managers who manage over Ł384 billion in pooled funds, both balanced and specialist.