Global eq­ui­ties highly favoured

Guardians of pen­sion as­sets snub­bing hedge funds for next year

The Star Malaysia - StarBiz - - Foreign News - By MARK GIL­BERT

WITH global in­vest­ment banks pre­dict­ing a lack­lus­tre 2019 for fi­nan­cial mar­ket re­turns, you might ex­pect the guardians of pen­sion as­sets to chase per­for­mance ei­ther by seek­ing the al­pha promised by hedge funds or warm­ing to Brex­it­beaten UK stocks. You’d be wrong on both counts.

Amundi SA, Europe’s big­gest fund man­ager, teamed up with CreateRe­search to sur­vey pen­sion man­agers across the Euro­pean Union.

The poll, pub­lished this week, cov­ered 149 plans over­see­ing 1.89 tril­lion (US$2.15 tril­lion).

Asked which in­vest­ments they an­tic­i­pate will de­liver their tar­geted re­turns in the next three years, the funds over­whelm­ingly favoured global eq­ui­ties, which were se­lected by 64% of re­spon­dents.

In­fra­struc­ture, which has gained in pop­u­lar­ity in re­cent years, came sec­ond and was cho­sen by 58%. So how did hedge funds fare in the beauty pa­rade?

They were se­lected by just 3% of the sur­vey par­tic­i­pants, putting them 23rd out of 25 as­set classes. Only cur­ren­cies and gold gar­nered less sup­port from the pen­sion man­agers.

That’s a pretty damn­ing in­dict­ment of the in­dus­try’s col­lec­tive ef­forts to con­vince in­vestors that it of­fers value for the higher fees charged. Un­for­tu­nately, that scep­ti­cism looks en­tirely jus­ti­fied.

Ab­sent a De­cem­ber re­bound, the port­fo­lios are poised to de­liver neg­a­tive re­turns for the year as a whole, ac­cord­ing to an in­dex compiled by Hedge Fund Re­search.

That will mark the 10th con­sec­u­tive year when pen­sion man­agers would have been bet­ter off in­vest­ing di­rectly in the S&P 500 in­dex.

So as the stew­ard of re­tire­ment nest-eggs, why would you con­sider al­lo­cat­ing any of them to the hedge­fund crowd?

The sur­vey spon­sored by Amundi, which over­sees 1.5 tril­lion, also makes bleak read­ing for any­one an­tic­i­pat­ing an end to the dismal per­for­mance of UK stocks, which have lagged their peers in re­cent months.

Just 5% of the re­tire­ment funds in the sur­vey put the UK among mar­kets that will de­liver the best re­turns in the next three years, rank­ing along­side Latin Amer­ica and beat­ing only Canada.

The study notes that uncer­tainty con­cern­ing how Brexit will be re­solved means “the econ­omy will re­main slug­gish and frag­ile.”

With fig­ures re­leased on Wed­nes­day show­ing growth in the UK ser­vices in­dus­try slowed to its weak­est since af­ter the Brexit ref­er­en­dum in 2016, the econ­omy risks con­tract­ing in the fourth quar­ter.

That’s not a bullish back­drop for Bri­tish firms that de­pend upon do­mes­tic de­mand for their rev­enue.

So what are pen­sion funds buy­ing? With quan­ti­ta­tive eas­ing dis­tort­ing the debt mar­ket, hard as­sets are in­creas­ingly be­ing used as a sur­ro­gate for gov­ern­ment bonds.

“It is widely be­lieved that the tra­di­tional 60:40 eq­uity-bond port­fo­lio will not meet re­turn tar­gets,” the re­port says. The sur­vey found that 62% of those polled are in­vest­ing in real as­sets, mostly prop­erty and in­fra­struc­ture, to bol­ster per­for­mance in what’s an­tic­i­pated to be a low-re­turn cli­mate.

And that may prove fa­tal to the like­li­hood of hedge funds com­ing back into fash­ion. As I ar­gued ear­lier this week, the big­gest risk fac­ing the in­dus­try in the com­ing year is be­calmed mar­kets mak­ing it more dif­fi­cult for ac­tive man­agers to gen­er­ate al­pha.

Un­less there’s a swift turn­around in per­for­mance, pen­sion plans will con­tinue to snub them and they’re right to do so.

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