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Cult of Equity Killed Off by Pension Funds

UK pension funds are holding more bonds than equities for the first time since the so-called cult of equity in the 1950s, say leading City fund managers.

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The switch into bonds, which began in about 2002, is the most significant shift in market allocation since the late George Ross Goobey made a landmark speech praising equities as a way of generating inflation-linked growth in 1956.

Alasdair MacDonald, head of investment strategy at consultants Towers Watson, said: "This is a watershed moment for UK pensions."

Alan Wilde, head of fixed income and currency at Barings, added: "The cult of equity is dead or has at least been on life support since 2002/3 following the dotcom crash and corporate problems in the US with the likes of Enron."

Pension funds have been slowly switching back to bonds in an attempt to beat the volatility of equity markets and receive guaranteed income streams to meet pension payments.

The Pensions Regulator, which collates data on 6,316 defined benefit schemes representing 12m members, said UK funds hold 43.2 per cent in gilts and fixed interest compared with 38.5 per cent in equities.

It is the highest allocation of gilts and fixed interest since the Pensions Regulator started compiling data in 2006 and the first time bonds have overtaken equities.

Towers Watson has data showing it is the first time pension schemes held more bonds than equities going back to 1995, although senior fund managers say it would be the first time since the late 1950s after the Ross Goobey speech.

Investors swiftly warmed to the idea of moving into equities after the then-pension fund manager of Imperial Tobacco sparked the trend, which has lasted more than 40 years.

However, the recent hunger for bonds, particularly gilts, has created problems for pension scheme managers as it has forced government bond yields to record lows, in turn pushing up pension scheme deficits. It has also created a dearth of supply of government bonds, particularly inflation-protected gilts, as pension funds snap up as many as they can to meet new regulatory requirements to hold less risky assets.

Mr. MacDonald said: "An interesting question is how much longer this trend can continue, given the shortage of index-linked gilts in the UK."

The Pensions Regulator said: "This is a long-term trend and, as schemes mature, they are looking to asset allocations providing a return that more closely matches their liabilities."

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