Don’t let the tail wag the dog
UK pension funds have witnessed sterling returns of 0.96% for global equities in the past 10 years (to March 31, 2010) with high levels of annual volatility. This includes two protracted periods of equity market weakness, the first driven by the bursting of the dot-com bubble and the second by the credit crisis. As in 2001/2002 investors have questioned the roles of active management and equities. With increasing longevity, a sharper focus on the sponsor covenant and tighter regulation, this questioning is easy to understand. Nevertheless, equities have delivered positive returns during bull market phases over the past decade, suggesting UK pension funds need to be more nimble in their asset allocation and more sophisticated in how they approach total return risk management.