Half of pension funds have recently altered the asset allocation of their investments, with the majority reducing exposure to equities in favour of alternatives, according to Baring Asset Management’s annual poll of UK pension schemes.
Of the 50 per cent of pension professionals that had changed recently changed the asset allocation of their fund, 69 per cent had increased their exposure to alternatives and 61 per cent had decreased their exposure to equities.
Respondents claimed that the main reason for making these changes was to reduce the volatility of the fund (61 per cent). The second most common reason for altering the asset allocation of their funds was to reduce the correlation of existing assets (54 per cent).
To mitigate the affects of market volatility, the research also found that the majority (44 per cent) of respondents are looking for greater diversification of their assets.
According to Barings’ research, other popular actions taken to lessen the effects of volatility include increasing the level of risk/return analysis and reviewing investment portfolios on a more regular basis.
Andrew Benton, head of UK and international institutional sales at Baring Asset Management, says: “This survey accurately reflects many of the concerns we hear from our pension fund clients. It is clear that pension funds are desperately seeking reduced volatility, greater diversification and consistent investment performance from their portfolios, as they strive to meet their liabilities. We are pleased to see that half of those we surveyed have recently made changes to their asset allocation. This demonstrates that many are realising the benefits of taking a more flexible approach to their investments and governance. In our view this can best be achieved by mandating investment managers with expertise in dynamic asset allocation. Trustees and investment managers need to be working together in order to navigate the current volatility that we expect to continue well into 2011.”
With regards to how pensions professionals may change their asset allocation going forward, an allocation to emerging Asia over the coming years seems increasingly likely. The research revealed that almost two thirds (65 per cent) of respondents asked believe that emerging Asia has the biggest potential for equity gains over the next 10 years. This is in line with the results of last year’s survey which found that 67 per cent answered Asia to the same question in 2009.
Finally, looking to how institutional investors are planning for the months ahead, the survey found that the biggest macro-economic challenge facing pension funds in the next six months is the European sovereign debt issue, with 65 per cent of respondents claiming it is of greatest concern.
Concern around the impact that further quantitative measures will have on investments is also worrying pension professionals, with 50 per cent of respondents claiming it is the biggest challenge facing them in the next six months.
Benton says: “Investors are understandably concerned about volatility and this concern has undoubtedly been exacerbated by recent high profile macro-economic events, such as the Fed’s announcement of a second round of quantitative easing and talk of currency wars. At Barings, we believe dynamic asset allocation is essential to gain true diversification of assets and reduce volatility in a portfolio.
“Furthermore we subscribe to the thesis that emerging markets will provide superior growth when compared to developed markets over the medium to long-term. Our clients are able to achieve this exposure via our dynamic asset allocation services or via our specialist regional and global emerging markets expertise on a stand-alone basis depending on their governance budgets.”