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Double-digit pooled fund returns for third year running

Balanced pooled funds achieved a median return of 5.3% in Q4 2005, leading to a double-digit performance for the third consecutive year. Over 2005, the average return for Balanced funds was 21.6%. This followed on from returns of 10.2% in 2004 and 18.0% in 2003.

Daniel Hall, Mellon Analytical Solutions’ Publications and Statistics Manager said, "Since the end of the equity bear market in early 2003, Balanced pooled funds have been fighting their way back. Strong equity performance throughout 2005 has meant that these funds have now finally got ahead of their position at the start of the decade. The median return over six years from the start of 2000 to the end of December 2005 was 2.0% p.a."

Positive returns were achieved in each of the major asset classes over 2005. UK Equities, the single biggest asset class for UK pension fund investment, realized a market return of 22.0%, while Overseas Equities returned 25.0% overall. Property achieved the only other double-digit performance, at 19.2% for the year. UK Index-Linked Gilts (9.0%) and UK Bonds (7.9%) outperformed the Cash return of 4.6%, while Overseas Bonds (4.3%) struggled by comparison.

Within Overseas Equities, Emerging Markets (49.9%), Japan (39.6%) and Pacific ex Japan (28.6%) provided the best market returns, while European ex UK and North American Equities also achieved double-digit returns of 23.6% and 20.0% respectively. North American returns were significantly boosted by the rise of the dollar against sterling over the year. By contrast the euro fell against the pound reducing returns.

UK Equity managers underperform

While active UK Equity managers beat the FTSE All-Share index in Q4 2005 with a median return, after fees, of 4.6% against 4.3%, they underperformed over one, three, five and 10 years. Over 10 years this underperformance was 0.4% p.a. with managers returning 7.5% p.a. against 7.9% p.a. for the All-Share index. However, on a gross of fees basis, managers achieved a median return of 8.3% p.a. over 10 years, beating the index by 0.4% p.a.

Active managers were successful in other sectors over the longer-term. Over 10 years, managers beat the index in UK Smaller Companies, Europe ex UK, Japan, Pacific ex Japan and Emerging Market equities, as well as in UK Bonds – Standard, Index-Linked, Cash and Property.

UK – best stocks and sectors

Mid cap stocks achieved by far the best market cap return over the year of 30.2%. By comparison, small cap stocks returned 22.4%, while large cap stocks returned 20.8%.

General Industrials (46.7%), Basic Industries (37.2%) and Resources (37.0%) provided the most notable economic sector returns of the year. Non-Cyclical Services (3.3%) and Cyclical Services (15.2%) underperformed by comparison. Information Technology, which produced the poorest sector return in four out of the previous five calendar years, returned 16.1% in 2005.

Lower yield (growth) stocks outperformed higher yield (value) stocks over the year, with a return of 23.9% against 20.6%. Over the longer-term however, value stocks were significantly ahead. Over three years, value stocks returned 19.3% p.a. against 17.3% p.a. for growth stocks, with the FTSE All-Share index returning 18.5% p.a. Over 10 years to 31 December 2005 value stocks were 7.5% p.a. ahead of growth stocks, with a return of 11.3% p.a. against 3.8% p.a. The FTSE All-Share index returned 7.9% p.a. over the same period.

UK Equity allocation hits a new year-end low

The total equity weighting within Balanced pooled funds rose by 2.3% over 2005 from 83.1% to 85.4%. However, the relative weightings of UK to overseas continued to change. Over the course of 2005, Balanced managers moved money out of UK Equities and into Overseas Equities. Consequently the average UK Equity weighting fell to a new year-end low of 48.7%, while the average Overseas Equity weighting reached 36.7%, a new high since our records began at the end of 1989.

This relative shift from UK to overseas in Balanced pooled funds reflects a long established trend that has been seen within UK pension funds as a whole. Ten years ago the ratio of UK to Overseas Equities within Balanced pooled funds, stood at 70% to 30%, whereas today this stands at 57% to 43%.

The main overseas sectors to benefit from the shift in 2005 were Japanese Equities where allocation rose from 5.1% to 7.2% and North American Equities which rose from 7.4% to 8.4%.

Manager movements and poor relative performance combined to reduce bond weightings over the year. UK Bonds fell from 7.3% to 6.4%, predominantly due to poor relative performance, while Overseas Bond weightings fell from 3.1% to 1.8%. Cash and Index-Linked weightings remained static at 5.3% and 0.3% respectively. Property fell by 0.1% to 0.8%.

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. We currently cover 77 separate asset managers who manage over £410 billion in pooled funds, both balanced and specialist.