FTSE DC schemes increase diversification

19 May 2017

Equities are continuing to fall out of fashion with FTSE defined contribution (DC) pension fund managers, who are putting more of their cash to work in bonds, credit and alternative assets.

The average default allocations of these funds to equities fell to 62% from 67% in the 12 months to April, the Schroders 2017 FTSE DC report has discovered.

This is another sign that FTSE DC funds are becoming more diversified at a time of meaty valuations in the UK and the US equity markets and heightened political risk.

When the investment manager first published the survey in March 2013 the average exposure to developed equities among FTSE funds was 79%.

The allocation of UK equities by such schemes has fallen to 22% from 33% during those four years.

In the 12 months to April investment in fixed income and alternative assets has increased. Average fixed income exposures reached 20.8% from 15.5%, growing by around a third to 21% from 16% since 2013.

FTSE DC default funds also turned to alternative assets with exposure to commodities, property, hedge funds, absolute-return funds and cash increasing to 13.1% from 12.5% in 12 months. Over four years the level increases to 13% from 7%.

Schroders head of UK institutional defined contribution Stephen Bowles said the investment environment will remain challenging thanks to the heightened political uncertainty surrounding the upcoming general election and the UK’s negotiations over its exit from the European Union (EU).

“This time a year ago a vote for Brexit and the election of Donald Trump both seemed far-fetched possibilities and proved that investors should avoid complacency, no matter what the bookmakers or polls may be saying,” he added.

“Our investment principles continue to support the benefits that diversification and risk management can bring to pension savers.

“And although equity markets on both sides of the Atlantic have recorded strong gains over the last 12 months, we would urge pension funds to remain focused on the advantages that diversified portfolios do bring and not fall into any rear-view mirror investment traps.”

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