Fighting volatility remains core focus for UK pension professionals

Reducing volatility remains the primary focus for UK pension professionals, according to the latest poll by Baring Asset Management (Barings).  Over a third (37.0%) reported they are ‘very concerned' about market volatility, with nearly half (45.7%) saying they are ‘slightly concerned'; just 2.2% said they were not concerned at all.  The survey found a sharp increase in volatility was a significant reason for recent changes to asset allocation - 69.0% of respondents said changes had been made to reduce volatility versus 50.0% in the last survey in April.

Over two-fifths (43.4%) of respondents who had recently changed asset allocation had increased their exposure to diversified growth funds.  Two-thirds (65.2%) said their fund invests in some form of multi-asset strategy, with 38.1% saying they had increased allocation to multi-asset strategies solely to reduce volatility (up from 34.0% in the previous study).  In contrast, the majority of pension professionals said they had reduced exposure to equities (56.7%, versus 35.5% in the last survey).

While just under a fifth (16.7%) of respondents increased exposure to fixed income investments, there was a big drop in sentiment towards the use of alternatives.  While they remain popular, with 46.7% of respondents saying they have allocated assets to alternative investments, this is down sharply from 77.4% in the last survey.  Cash has fallen out of favour completely - no respondents reported increasing their allocation to cash, versus 9.7% last time.

Andrew Benton, Head of UK and International Institutional Sales at Barings, commented, "It is clear that reducing volatility remains a fundamental focus for pension professionals, driven by fears around the stability of the global economy and perceived levels of market risk - particularly with regards to equities.  The increased focus on diversification, in particular through the wider use of multi-asset products, illustrates how nuanced this effort to manage volatility has become.

"It is interesting to note the big upswing in numbers of respondents changing investment managers: 63.0% said they had recently changed manager, up from around half (54.2%) in the last survey.  The main reasons given for this change were not enough exposure to a certain asset class (37.9%), underperforming investments (also 37.9%) and overly volatile investments (34.5%)."

According to the Barings poll, the biggest macro-economic challenge to investment growth over the next six months remains Europe's debt crisis (cited by 80.4% of respondents, but down from 87.4% in April).  The biggest change in sentiment was towards China and a potential economic slowdown - at 56.5% it was considered the second biggest challenge, up substantially from 27.1%.  In third place was the so called US ‘fiscal cliff' (47.8%), a reference to the projected $700 billion worth of expiring tax cuts, automatic spending cuts and other fiscal tightening measure set to be implemented from January 2013.

Emerging Asia remains the region that investors expect to offer the biggest potential for equity gains over the next ten years, although the number is down slightly from 50.0% from 54.2%.  Frontier markets remain the second favourite region, though again the number has fallen: from 20.8% in the last survey to 13.0%.

Andrew Benton commented: "Despite the market volatility, there is a variety of investment solutions and options available for pension professionals aimed at reducing risk.  We continue to see great demand for our suite of multi asset products, for instance.  The Baring Dynamic Asset Allocation Fund, the investment vehicle for our Defined Benefit clients, has now reached an AUM of £5.4bn (as at 31 October 2012) having launched in January 2007."

For more information, visit barings.com.