UK pooled balanced pension funds continued to make small gains in the second quarter of 2004, achieving a median return of 0.7% (1.1% in quarter one). But, during the quarter, positive overall equity returns were offset by negative returns in bonds and index-linked stocks. Or so say Russell/Mellon.
Daniel Hall, Russell/Mellon’s Publications and Statistics Manager said, “While balanced pooled fund performance in quarter two was not spectacular, this was the fifth consecutive positive return.”
UK Equities achieved an index return of 2.2% this quarter, while Overseas Equities returned 1.5% overall. By contrast, UK Bonds (-0.8%), Overseas Bonds (-2.2%) and Index-Linked Gilts (-0.4%) all struggled. Property provided the best return of 5.5% this quarter, while Cash returned 1.0%.
There were mixed results within the overseas equity markets. Sterling fell against both the dollar and the euro over the quarter effectively boosting local returns to the UK investor. This currency effect, taken in conjunction with good local performance, meant that European and North American Equities provided the best returns of 4.2% and 2.7% respectively. By comparison, Japanese Equities returned -2.4%, Pacific ex Japan Equities returned -3.6% and Emerging Markets produced the poorest market performance of -8.4%.
UK managers continue to beat the index over three and five years Active UK Equity managers underperformed the FTSE All-Share index this quarter with a median return, after fees, of 1.4% against the index return of 2.2%. They have also underperformed over the last 12 months, with a median return of 16.0% against the index of 16.9%. Over the medium-term, however, these funds continued to outperform. Over three years, active UK Equity managers returned -3.0% p.a. on average against -3.5% p.a. for the index; over five years the median was -2.1% p.a. against -2.7% p.a. In contrast, over the 10 years to 30 June, these funds underperformed by 0.4% p.a. with a return of 7.3% p.a. against the index of 7.7% p.a.
UK Smaller Companies managers were more successful, beating the FTSE Small Cap index over the quarter and year as well as over three, five and 10 years to 30 June 2004. Over 10 years the median return, after fees, was 9.6% p.a. compared with 6.8% p.a. for the index.
Within the UK equity market, the large cap stocks of the FTSE 100 index provided the best return of 2.5% over the quarter. Mid and small cap stocks both underperformed the All-Share index with returns of 1.2% and -1.1% respectively.
General Industrials provided the best UK economic sector performance for the second consecutive quarter, returning 8.9%. By contrast, Information Technology was the poorest performer with a return of -5.6%.
Higher yield (value) stocks outperformed lower yield (growth) stocks for the fourth consecutive quarter, returning 3.3% against 1.3%. Value stocks were also significantly ahead over the one, three and five years to 30 June 2004. Over five years the out performance is 12.0% p.a., with value stocks returning 2.5% p.a. against -9.5% p.a. for growth stocks.
The average Overseas Equity weighting in Balanced pooled funds rose for the seventh consecutive quarter, from 30.8% to 31.1%. This represents yet another new high since our records began in 1989. European ex UK Equity weightings saw the biggest rise of 0.8% over the quarter, from 10.9% to 11.7%. This was due to a combination of good relative performance and manager movements into the sector. By contrast, weightings in Pacific ex Japan Equities fell by 0.5% from 5.1% to 4.6%, predominantly due to poor performance.
Despite the good relative performance in UK Equities during the quarter, average weightings in this sector fell from 52.4% to 52.0%. This was due to managers moving money out of the sector. These movements were largely offset by movements into Overseas Equities. Consequently the average overall equity weighting in Balanced pooled funds only fell by 0.1% from 83.2% to 83.1%.
UK and Overseas Bond weightings fell to 7.5% and 3.4% respectively, this quarter, while weightings in Index-Linked, Property and Cash all rose.
The Pooled Pension Fund Database covers the largest and most representative sample available to UK pension funds’ trustees. It currently covers 76 separate asset managers who manage over £272 billion in pooled funds, both balanced and specialist.