Feature | UK equities
When launching the search for firms to manage the fund in April 2018, Brunel’s chief investment officer, Mark Mansley, said: “UK equities is still an important allo- cation for many investors.” However, Brunel appears to be taking a contrarian view here. Institutional investor exposure
to London-listed been declining for years.
Indeed, UK DB pension scheme allocations to domestic equities had slumped to 7% by 2018, according to Mercer, a consultant. Yet the level had stood at more than 30% in 2008. “Corporate defined benefit pension scheme allocation to equities has been coming down consistently for quite a long time now,” says John Belgrove, a senior part- ner at Aon.
GOODBYE GROWTH
It appears that UK pension schemes are not falling completely out of love with equities, just those listed in Lon- don. Exposure to overseas equities is 18%.
UK institutional investors do not have as big a domestic bias as their counterparts in France, where the level of overseas list- ed-company shares is as low as 4%. Almost no (1%) DB schemes serving UK workers plan to increase their allocation to domestic equities, while 23% intend to move capital from listed companies to other assets.
Of those with an overseas equity portfolio, 8% will invest more in these assets, which is half of those planning to reduce their exposure.
UK government debt is the preferred desti- nation, a sign that schemes are locking in any gains secured from the prolonged stock market bull-run that is believed to have all but ended. Of those looking for a new home for their capital, 28% intend to increase exposure to gilts and 31% to inflation-linked versions. Fixed income and fixed income- type assets have proved popular. UK final salary schemes were 50% in bonds last year and 21% in alternatives.
“That is not being driven by investors’ pre- dictions of what the returns will be over 10
40 | portfolio institutional | March 2019 | issue 82 equities has
years or even 10 months,” Belgrove says. “It is being driven by structural de-risking issues. Those are the external impacts that trustees are thinking about. They are think- ing about their journey plan as well as meeting their obligations and liabilities.” One of the reasons behind this change in strategy is that time horizons are shrink- ing. Trustees are pulling out of growth assets, such as equities, and are moving into assets that provide stable and regular cash returns. Many are maturing in that the sponsoring company is no longer making contribu- tions and the trustees are looking at the
equity going on. So that has accelerated a reduction in a direct allocation to UK equities.”
PROS AND CONS
Defined contribution (DC) retirement scheme NOW: Pensions’ equity allocation is typically spread a third in UK, a third in the US and a third in Europe. With its UK allocation to domestic equities higher than the 7% Mercer says institutional investors are holding, NOW: Pensions has a bias towards the asset class. “There’s always going to be a bit of a UK bias,” says investment director Rob Booth,
If you look within the equity components,
the allocation to UK equities for your typical UK pension plan has been decimated. John Belgrove, Aon
endgame. This could be handing over the responsibility for the scheme to an insurer through a buyout, merging with one of the so-called super-funds or focusing on self-sufficiency. To help meet these endgames, diversifica- tion has been the name of the game among pension schemes for the past 10 to 15 years. Schemes have been moving out of growth assets and into investments such as infra- structure debt and investment-grade corpo- rate bonds.
It makes sense to get certainty of return and to take less risk as a scheme moves closer to its endgame, but still generate the cash needed to pay its pensioners. “If you look within the equity components, the allocation to UK equities for your typi- cal UK pension plan has been decimated,” Belgrove says. “Since 2000 we have seen a move away from a domestically-focused equity portfolio to a global portfolio. “So you have two things running at the same time,” he adds. “You have a move from local to global and a move out of
while speaking at an event hosted by portfo- lio institutional in March.
A drawback with UK institutions building a portfolio of overseas equities is that they need to hedge currency risk, which, accord- ing to Pete Drewienkiewicz, chief invest- ment officer, global assets, at Redington, is “quite difficult to get”.
Booth says that his scheme uses a lot of futures in its investment portfolio. “So we have some currency hedging built in, but there’s an underlying approach to say we’ll target roughly 100% currency hedging.
“It all comes back to the fact that if we have UK savers who are being paid in sterling, going to save in sterling and then spend in sterling, at the end of the day why would we have that floating currency risk going on all the time? “Compared to the global cap there’s a slight overweight UK perspective across the board. It is UK inflation that’s rather more important to us than global inflation, for instance,” he adds.
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