BMOJun 5 2017

Pension schemes shun risk to lock in gains

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Pension schemes shun risk to lock in gains

Pension schemes took risk off the table in the first quarter of the year, according to BMO Global Asset Management’s quarterly survey.

Buoyant equity markets and rising yields, driven by the expectation of a normalisation of monetary policy, improved the funding ratios of many schemes in 2016.

This prompted schemes to de-risk and expand their hedging programmes.

“Positive equity market moves towards the end of last year led to a theme of protecting gains," said Rosa Fenwick, LDI portfolio manager at BMO Global Asset Management.

"Equities are still the most popular return asset and, despite their elevated levels, remain an attractive long-term asset class. Pension schemes that are keen to retain long term exposure, but have short term concerns, have shown interest in downside protection,”

Both interest rate and inflation hedging activity rose in Q1 2017. Interest rate hedging increased by 7 per cent over the quarter, to £29.7bn, and inflation hedging rose by 4 per cent, to £24.8bn.

Hedging activity primarily comprised new hedging from pension schemes, due to an increase in appetite to de-risk.

A further theme of the quarter was a rise in new low coupon bond issuances that allowed schemes the opportunity to switch between individual bonds to release cash.

Commenting on the investment outlook, Darius McDermott, managing director, Chelsea Financial Services, said: "UK equities are expensive, but not outrageously so - market multiples have been higher before.

"So yes, the market could well climb higher and if long-term investors want to invest I see no reason not to - they just need to be aware that in the short term, if markets get spooked, there could be a correction."

He continued: "I've not been a fan of bonds for some time now as the risks of rising interest rates and inflation are starting to increase. They still have a place in a portfolio for diversification and income but I actually prefer absolute return funds for this job if I am allocating new money anywhere."

Patrick Connolly, communications manager at Chase de Vere, said his firm does not try "to time stock markets and so wouldn’t deliberately be reducing risk".

"However, we do rebalance client portfolios on a regular basis and so when markets perform well we would effectively be taking profits and reinvesting into assets which haven’t performed as well. This has the effect of managing risk and ensuring our clients don’t become over-exposed to equities.”