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WM UK pension and charity funds had strong 2012, says State Street

Initial estimates for the WM UK Defined Benefit Pension Fund Universe and the WM UK Charity Fund Universe suggest a strong year for both sectors in terms of asset performance, according to State Street.

The company expects the headline industry average returns to be in the region of eight per cent for pension funds and 11 per cent for charity funds. Reversing the outcome of the previous year, funds that have retained significant real asset exposures will have fared best.
Although the outcome for the year is positive, 2012 has been a very difficult one for asset owners and managers. Unprecedented central bank intervention has provided support, but this has been pegged back by stubbornly low global growth combined with the ever-present eurozone sovereign debt crisis. Equity markets began the year brightly buoyed by better than expected US economic news and a second round of the European Central Bank’s long term refinancing operation. The appetite for risk assets waned by the summer as equities retreated and “safe” assets outperformed. Since the summer, however, the announcement by the US Federal Reserve of a further bout of quantitative easing and European Central Bank chief Mario Draghi’s promise to do “whatever it takes” to preserve the Euro have provided powerful tail winds, supportive of riskier assets, particularly equities.
“Whilst positive asset returns are very welcome, trustees and fund sponsors remain challenged with ultra-low bond yields continuing to weigh on the liability side of the balance sheet,” says Jeanette Patrizio, senior vice president of State Street Investment Analytics.
UK equities, strategically important and the largest single component of the majority of funds, gained 13 per cent over the year, outperforming the benchmark FTSE All Share index for a second consecutive year. International equities, which represent 25 per cent of the average fund’s assets, delivered 12 per cent in aggregate but, regionally, results varied. European equities were the best performer over the year at 18 per cent, whilst, in contrast, returning under five per cent was Japan. Double-digit returns were enjoyed by North American, emerging and the lesser Pacific markets.
Currency influenced the returns on international assets as Sterling appreciated against the three main currencies and most notably the Yen. Funds which hedge their international currency exposure will therefore have seen returns enhanced as a result.
In a year that largely favoured risk assets, highly-rated bonds enjoying safe-haven status underperformed corporate bonds; long-dated UK Government bonds, for example, returned only 3 per cent, with corporate bonds enjoying returns of 13 per cent.
Returns from alternative strategies varied, but were positive as was the total return on property, where healthy yields succeeded in offsetting the impact of falling values.
The vast majority of defined benefit pension funds and charitable funds are run against strategic asset allocations designed to meet specific long-term investment risk and return criteria.  These strategies will have defined the individual fund outcomes for 2012.  Pension funds that have a long time horizon, strong employer covenant or remain open to future accruals performed very well over the year, as should most charity funds.
Despite the marked differential returns from real and monetary assets, the average fund’s asset mix remained largely unchanged throughout the year. At a macro level, funds sold equity and bought bonds likely seeking to preserve allocations in line with asset strategies, as opposed to actively de-risking.

Elsewhere, exposure to alternative assets remained broadly static, with the more established of the underlying asset types, hedge funds and private equity, being recipients of new money. Funds continued to buy property despite the challenging environment, although here too, the overall allocation showed no change.

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