· A third of UK pension professionals have increased their level of risk/return analysis to counter market volatility
· 60% say a fund manager’s risk management process is ‘very’ important when awarding pensions mandates
· Significant asset allocation shift towards multi-asset strategies
London, 12 December 2011 – Baring Asset Management’s (Barings) annual poll of UK pension schemes* has revealed that UK pension professionals, in a direct response to the market volatility, are putting extra emphasis on superior risk management when building portfolios and awarding mandates. Fund managers’ risk management process was identified by respondents as their main consideration when awarding pensions mandates – with a combined 98% citing this as either ‘very’ (60%) or ‘quite’ (38%) important.
The research, conducted online among professionals involved with the investment management of a UK private or public pension scheme, found that nearly 80% of respondents were either ‘very’ or ‘slightly’ concerned about the currently market volatility. When asked what, if anything, they were doing to mitigate the effects of this volatility, one in three (33%) said they were increasing their level of risk/return analysis. Nearly half (48%) also said they were better diversifying assets to combat the heightened market risks, while 26% were shifting asset allocation towards multi-asset products.
While this year’s poll shows that equities remain the largest portfolio weighting overall at some 46%, this has dropped from 55%, compared to last year’s survey. In contrast, respondents are increasing their allocation towards fixed income assets (now 26% of average asset allocation). In alternatives such as hedge funds (16%); and, most visibly, in multi-asset instruments (now 18%, up from 3% last year). Multi-asset funds give managers freedom to build a robust portfolio from a diverse range of instruments, with the ultimate aim of generating attractive risk-adjusted returns for investors.
Understanding risks – and opportunities – has become critical given the number of factors behind the current market instability. Nearly 90% of respondents to the Barings poll believe that the European sovereign debt crisis is the biggest macroeconomic challenge to investment growth over the next two quarters. This is followed by excessive US debt (48%), a possible asset bubble in China (31%) and the high inflation rate in the UK (14%).
Andrew Benton, Head of UK and International Institutional Sales at Barings commented, “It is unsurprising to see risk management becoming a more high profile investment concern given the greater pressure on pension professionals to navigate funds through the market unpredictability. This is a time of unnerving volatility and, for many people a declining appetite for risk.
“Risk awareness has also become more commonplace given the increase in industry regulation and market oversight. At the heart of many of these initiatives are concerns by regulators over the ability of pension providers to meet long-term commitments, and this has subsequently driven increasing interest in strong risk management.”
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