When a crash comes, it comes with a vengeance. It is far too soon to describe the current downturn in investment markets as a crash, but the latest performance figures for group managed pension funds is nothing if not blunt in its recording of a second-quarter fall that has been as dramatic as anything the markets have ever spewed out before.
Should pension fund contributors be worried? Perhaps only if you're retiring in the forseeable future and didn't protect your fund by switching out of (mainly) equities and into a safer asset class, such as cash or gilts.
Coyle Hamilton's and Buck Consultant's latest quarterly reports show just how volatile markets have been. In the year to date, managed pension funds have produced superb averaged returns of more than 32 per cent. Over nine months and 10 percentage points are knocked off and the return drops to about 22 per cent. Three months later and the slide continues to just under 19 per cent. Between April and June, and for the first time in 12 successive quarters pension fund returns have flattened out completely at 0.3 per cent.
As every pension company insists when markets are doing badly - but rarely emphasises when they perform spectacularly - short-term beauty parades are pretty irrelevant to an investment fund that might have 30 or 40 years to run before the client cashes it in. Certainly the three-year and five-year figures are very encouraging with average weighted returns of 26 and 18 per cent respectively during periods when the consumer price index barely hit 2 per cent. (These figures do not include charges - investors should knock at least 2 per cent off for a more realistic rate of return.)
Though they haven't shown it much over the past three years, investment markets are both volatile and cyclical. The latest sudden drop could be a manifestation of both, though few are predicting - yet - that the shift will be so dramatic as to produce negative growth for more than a short period.
Someone about to choose a pension fund might use this time to look at some investment fundamentals - asset mixture, past fund performance, the pension type (unit-linked or with-profit) and charges. These are all issues that will be automatically presented in a transparent and simple-to-interpret way if and when PRSAs (Personal Retirement Savings Accounts) come on the market. But considerable legislation will be needed before then. Until the advent of the PRSA, which will be kite-marked to show that it has fulfilled design and investment standards, pension-fund investors - or better still, their advisers - need to do such checks themselves. The Coyle Hamilton report is a useful place for the novice to get some idea of what constitutes managed pension funds and how companies allocate their money. For example, at the moment the average fund has a 36.7 per cent exposure to Irish equities, 35.8 per cent exposure to overseas equities, nearly 15 per cent and 3.5 per cent in Irish and overseas fixed-interest assets (i.e. gilts) respectively, 2.9 per cent in Irish property, 0.2 per cent in overseas property and 6 per cent in cash indexed funds. Particularly significant is the mixture of overseas equity markets into which the Irish funds managers have invested up to an average of 35.8 per cent of their funds (no manager has less than 32 per cent exposure or more than 40 per cent). The breakdown is as follows: UK (11.0 per cent); US (9.0 per cent); Europe (11.9 per cent); Far East (excluding Japan) (1.5 per cent); Japan (2.1 per cent) and Others (0.3 per cent). It isn't easy, from these indicators, to explain why some companies have performed that much better or worse than others. But a comparison of say, BIAM and Norwich Union, as two fund managers who have consistently under-performed and exceeded the averages respectively over each period, shows why weightings are so significant.
BIAM's exposure to Irish equities (27 per cent), the Far East and Japan (5.8 per cent) and fixed assets (24.3 per cent), is in stark contrast to Norwich Union's position: Irish equities (42 per cent), the Far East and Japan (1.0 per cent) and fixed assets (12 per cent). BIAM's hope - no doubt - is that it will be better placed, by its higher exposure to fixed assets to ride out a drop in equity values than those companies that are not, and then to increase its equity position. For the novice investor trying to weigh all this up, perhaps the message is that bucking the averages is a risky game for everyone and sometimes it is sheer luck that can be the final arbiter of a successful investment period. (Luck, it must be said, plays a part in knowing which fund manager to choose in the first place.) The one element that is never included in these performance surveys - since it only impacts on the actual cash fund paid out and not fund performance, are charges, and this is a subject we will return to shortly.
