A weaker pound saw the FTSE 100 reach record highs in May with it peaking over 7,500 for the first time.
On the 16 May, the FTSE 100 reached 7,522.03 and has since remained high, which Gatemore Capital Management UK managing director Mark Hodgson says is “hugely beneficial” for owners of equities, including pension funds.
However, as Schroders portfolio solutions strategist Alistair Jones highlights the welcome development for UK-listed companies may not have an effect on defined benefit funding levels. He notes that figures from The Pensions Regulator show UK pension schemes only have an average 7 per cent allocation to UK equities, having switched out of the asset class heavily over the past decade.
“Private sector pension schemes tend to hold most of their equities in global companies. Many pension schemes’ global equities received a significant boost after the Brexit vote, when sterling depreciated and overseas assets rose. In the light of that, UK equities still have some way to get back to the levels of global equities that have not been currency hedged,” he explains.
“For schemes that have experienced some unexpected gains on their UK equities, it would be prudent for them to continually re-assess their exposures to this sector, as they should with all asset classes and geographies. Risks while Britain negotiates its exit from the EU will persist for the next couple of years.”
Newton Investment Management global head of distribution Julian Lyne also noted that the “days of UK pensions being invested predominantly in the shares of the top 100 UK countries are long gone” with scheme asset allocation now “far more diverse both in terms of geography and increasingly away from equities into fixed income and other diverse asset classes”.
However, it is not just the FTSE that has seen increases, as price-earnings ratios in the UK, Europe and the US are all pushing top decile figures and bond prices in the UK are at historical highs, Hodgson notes. So too has the VIX, which has “risen off lows not seen since before the financial crisis”. Hodgson says that this either indicates sustainability of markets, or more, likely, complacency.
“Throw in growing geopolitical risk and it is difficult, as we head into the summer, not to be a little concerned,” he says. “Pension funds relying on equities alone should be rightly worried. Even those who think they are immunised through diversification should be looking at how that diversification is achieved – is it through listed vehicles, which are likely to suffer in a broad market downturn, or is it through real exposure to different drivers of return, which should provide protection.”
Hodgson adds that the next few years could be when diversified growth funds “earn their corn” and when we find out if they are truly diversified. “In the words of Warren Buffet, ‘only when the tide goes out do you discover who has been swimming naked’.”