Decade-Low for Equity Returns

UK pension fund returns only just beat inflation rises last year and equities were to blame. 

(March 30, 2012)  —  Equities scored the lowest quarterly return in a decade for pension funds in the United Kingdom last year as investors continued to push out of the asset class, custodian BNY Mellon has reported.

The median fund lost 13.6% on its UK equities and 16.4% on its overseas equity portfolio in the third quarter of 2011, the custodian reported this week. These are the lowest quarterly median returns BNY Mellon has recorded for equities since the stock market downturn in the third quarter of 2002.

“UK pension funds were particularly affected by instability in the equity markets during the third quarter of 2011, which was partially due to fears over the Greek debt crisis spreading to Spain and Italy,” said Alan Wilcock, Performance & Risk Analytics Manager, BNY Mellon Asset Servicing. “The sharp fall in stock prices during August was also at the same time the United States government’s credit rating was being downgraded for the first time.”

Positive movements in the first half of the year were mostly offset in the third quarter, pulling the total year return down to an 8.8% loss for overseas equities overall and a 3.4% for UK equities.

Despite most economic problems hitting the Eurozone, emerging markets felt most of the pain of investor fear and lost an average 18.4% for UK pension funds across the whole year.

The United States was the most successful major equity market for UK pension funds last year, returning an average positive 0.4% return.

Good performance from gilts added to the overall return of UK pension funds – an average 24.8% – but lower interest rates meant their liabilities, and thus deficits, soared.

Overall, the average UK pension fund returned 4.3%, which was equivalent to 0.7% above the Retail Price Index in 2011. This took the ten year average to 2.5% over this inflation calculation for the past decade.

BNY Mellon indicated the investor shift out of equities continues apace. Over the past ten years investors have reduced their allocation to the asset class from 72.4% to 45.3% in favour of fixed income and alternative assets.

This week Russell Investments warned investors against pulling out of equities entirely as they offered important diversification tactics for a portfolio.