Bonds continue to be the dominant asset class among continental European funds. In particular, exposure of German and French funds is 62% and 66% respectively.   

2. UK Funds

Changes in the UK pension fund liability profile

There continues to be no dramatic change to the overall liability profile of clients in the survey. The proportion of liabilities relating to active members decreased by only 1% - from 41% to 40% - despite the fact that 60% of schemes are now closed to new entrants. 

Changes in net asset allocation

UK funds continue to reduce their equity exposure (from 62% down to 61%) over 2006 but the reduction remains small at one percentage point, on average. The average allocation of UK funds has reduced by 7% over the past four years, i .e. at a rate of approximately 2% equity per annum (68% in 2003 to 61% by 2007).

Domestic equity allocations continue to reduce (57% of equities to 53% over 2006) at the expense of international equity investment, with one in four funds now hedging part of their currency risk.

The average allocation to bonds is now 36%.

Other assets

Unsurprisingly, property continues to be the most popular alternative to equities and bonds, with 20% of funds having some allocation. Other popular alternatives show 8% employ an active currency manager and 6% of funds now in hedge funds.

Anticipated changes in 2007

Increased use of swap overlays and fund-specific benchmarks for bond mandates. These options are proving equally popular, with 10% funds considering the one and a further 10% considering the other.

Around one in ten funds has indicated an interest in adding exposure to each of fund of hedge funds, active currency and GTAA. However, interest in non-traditional strategies is not universal, with commodities, infrastructure and timber unlikely to see much asset flow based on the responses received.

3. Continental Europe and Ireland funds

Changes in asset allocation

The equity allocation of European funds (excluding UK) has increased from 40% to 42% over the course of 2006. This would appear to indicate that there was no shift to or away from equities over the period as the 2% increase may be explained by relative performance differentials.

We would, however, advise caution in deducing trends from two years of data. The sample is still settling and the impact of this is most notable at country level. At an aggregate level, the larger sample provides a more robust base for meaningful analysis.

Other Assets

There has been a material increase in the use of active currency managers over the course of the year, with exposure rising to 4% of funds surveyed. These managers are often used as a source of active risk, independent of hedging considerations.

Property remains the most popular holding after equities and bonds, with around half of respondents having some degree of exposure. This exposure is not, however, uniform with a large majority of Irish funds having exposure whilst ‘only’ 28% of Dutch funds hold the asset.

Anticipated changes in 2007

A continued focus on risk management across the countries surveyed. In general, there appears to be an emerging preference for passive management against fund-specific benchmarks. However, the Dutch seem to lean towards actively managed bond portfolios measured against fund-specific benchmarks.

If you have any questions about the survey, or would like a hardcopy, please contact Lianne Suckling.