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UK pension fund survey: Overall equity allocations drop to 63.9%

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Nearly half of UK pension funds now have hedge fund investments as the appetite for alternatives among pension funds continues to grow.

Nearly half of UK pension funds now have hedge fund investments as the appetite for alternatives among pension funds continues to grow. Baring Asset Management’s (Barings) annual select poll of UK pension schemes also reveals that emerging Asia is considered to be the region with the biggest potential for equity gains over the next ten years.

Investments in Asian equities remain at approximately the same levels as last year (slightly reduced from 13.2% to 12.6%), yet for the asset class as a whole pension funds have reduced their allocations to equities in the last year from 70.8% to 63.9%.

The study has revealed a significant shift of allocation of pension fund assets to hedge funds.  In 2006 just 17% of those surveyed invested in a single strategy or fund of hedge funds.  This year that figure has increased dramatically to 47.8%, reflecting increased levels of interest in alternative investments from institutional investors. However, the average proportion of a scheme’s total assets allocated to hedge funds is still relatively low at 3.7%, up from 3.4% last year.

Despite an overall reduction in allocations to equities from 70.8% last year to 63.9% in 2007, the majority of UK pension funds (50.5%) are still positive on the prospects for global equity markets believing that they will increase in value over the next 12 months.

Only 4.5% expect global equity markets to decrease in value, however the majority of schemes (52.3%) do not intend to increase their allocation to equities in the next year. Just 8.7% are planning on increasing their allocations to global equities.

Korea has overtaken China this year as the country viewed as having the most investment potential over the next 12 months.  Interestingly Hong Kong is viewed as the second most likely to outperform in the next 12 months, followed closely by China.

Pension funds are least confident on the prospects for the US.

Pension funds are still cautious when it comes to emerging markets, with just 4.3% stating that the recent global market volatility would make them more likely to invest in emerging economies.  78% stated that they would not be changing their allocation to emerging equities.

Marino Valensise, Chief Investment Officer at Barings says, ‘This year’s study has revealed some very interesting findings.  Schemes are clearly aware of the opportunities that exist in emerging markets and are more open to the options that are available to them in the alternatives space.’

‘In our view, Asia still offers UK pension funds the best growth potential for the long term, and we believe that many schemes still have too little invested in Asian equities. Indeed over the past year, Asia has been a potent MSCI region and this performance looks set to continue.’

‘We suggest that schemes start to place greater emphasis on exploiting the scope for excess returns through actively managed strategies as the region is re-rated. What happens in Asia over the next five years will have a dramatic impact on world markets but it is the domestic Asian story that presents the most exciting opportunities for investors.’

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