Pooled funds achieve double-digit returns for fourth consecutive year says Mellon Analytical Solutions
Statistics unveiled by Mellon Analytical Solutions (MAS) today revealed Balanced pooled funds achieved a median return of 4.9% in Q4 2006. The average Balanced fund return for the whole of 2006 was 11.0%, the fourth consecutive year of double-digit performance.
Commenting on the results Daniel Hall, Mellon Analytical Solutions’ Publications and Statistics Manager said: “Over the seven years since the start of the decade, Balanced pooled funds have achieved a median return of 3.1% p.a., barely ahead of retail price inflation of 2.8% p.a. However, these funds have achieved double-digit returns in seven out of the last 10 years. Consequently over a 10-year period, performance was a much healthier 7.0% p.a.”
Active managers outperform in key sectors over the quarter
Active pooled managers outperformed in a number of key sectors in Q4 2006, including UK Equities, Overseas Equities, UK Bonds and International Bonds. Over the quarter, UK Equity managers achieved a median return of 6.7% on a net of fees basis, against 6.2% for the FTSE All-Share index. However, they were less successful over the longer-term, underperforming over one, three, five and 10 years. Over 10 years the underperformance was 0.6% p.a. with managers returning 7.3% p.a. against 7.9% p.a. for the All-Share index. On a gross of fees basis managers achieved a median return of 8.1% p.a. over 10 years, beating the index by 0.2% p.a.
Active managers were successful in other sectors over the longer-term. Over 10 years, managers beat the index in a number of equity sectors namely, UK Smaller Companies, Europe ex UK, Japan, Pacific ex Japan and Emerging Markets, as well as in UK Bonds – Standard, Index-Linked and Cash.
UK Equity allocation falls to year-end low
Although UK Equities performed well in 2006, Balanced managers moved money out of the sector. Consequently the average UK Equity weighting within Balanced pooled funds fell from 48.7% to 47.0% over the year. This represents a new year-end low since our records began at the end of 1989.
Overall overseas equity weightings also fell over the year, from 36.7% to 36.3% however, there were shifts in allocation between the different regions. Despite poor relative performance, the average weighting in North American Equities rose by 1.2% over the year, from 8.4% to 9.6%, as managers moved money into the sector. This weighting represented a year-end high for this asset class. The other major equity shift occurred in Japan, where a combination of poor relative performance and manager movements out of the sector reduced weightings from 7.2% to 5.5%, over the year.
UK Bonds performed relatively poorly over the year however, managers moved money into the sector and consequently weightings rose by 0.9%, from 6.4% to 7.3%.
Pooled fund of hedge funds outperform
MAS has also published results from their pooled fund of hedge funds universe for periods to 30 September 2006. In this analysis MAS found that pooled fund of hedge funds outperformed key equity pooled funds over five years to 30 September 2006.
Over this period, the median return for MAS’ pooled fund of hedge funds universe was 10.0% p.a. compared with median returns of 9.0% p.a. for UK Equity pooled funds and 7.5% p.a. for Overseas Equity funds. This outperformance was achieved with much lower risk than many equity investments. The median standard deviation for the fund of hedge funds universe was 5.3% p.a. against 14.8% p.a. for UK Equity funds and 16.1% p.a. for Overseas Equity funds.
However, MAS found that property achieved the best pooled asset class performance over the period (14.2% p.a.) with an even lower standard deviation (3.0% p.a.) than fund of hedge funds. Commenting on the results Daniel Hall said: “The results from our analysis indicated that over the five-year period, a reduction in overall equity weightings in favour of an allocation to fund of hedge funds would have reduced risk levels and boosted performance within a balanced or multi-asset structure.”
Market round-up
UK Equities, which remains the single biggest asset class for UK pension fund investment, gave a market return of 16.8% in 2006. Other equity markets also contributed to the overall double-digit pooled performance; namely, Europe ex UK, which returned 19.7%, Pacific ex Japan (18.8%) and Emerging Markets (15.9%).
The strength of sterling over the year had a significant, negative impact on the returns achieved in North American and Japanese markets. North American Equities saw a local index performance of 15.9% reduced to 1.7% in sterling terms, while Japanese Equities saw a positive local return of 6.5% reduced to -7.4%.
Property provided the best overall performance of 2006, returning 20.0%. UK Cash (4.6%), UK Index-Linked Gilts (2.9%), UK Corporate Bonds (0.8%) and UK Gilts (0.7%) also achieved positive index returns over the year. Overseas Bonds provided the only negative non-equity return of -7.5%.
CAPS Pooled Pension Fund Update is a Mellon Analytical Solutions service. The Pooled Pension Fund Database covers the largest and most representative sample available to UK pension funds’ trustees. MAS currently covers 79 separate asset managers who manage over £419 billion in pooled funds, both balanced and specialist.
MAS information disclaimer
The performance analysis and other information in this (report and/or press release) are based on historical data and are intended for informational purposes only. Past performance is not a guarantee of future performance. This (report and/or press release) does not constitute investment advice, nor is it an offer or recommendation of any security, investment product, service or firm.
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