A lot has changed since 1962, particularly in the world of finance and pensions.
UBS recently published a weighty tome containing some fascinating data on global markets and pension funds:
Worth a read, one thing I found particularly interesting was the long-term data going back 50 years on the asset allocation and aggregate asset returns of UK pension funds.
How things change: asset allocation among UK pension funds 1962-2014
Lots of interesting trends to draw out of this data, including-
- Back in the 1960’s the allocations were very UK centric, split roughly equally between equities and bonds (in terms of liability-relative risk, this was probably a much better-hedged position than pension funds held for the majority of the next few decades).
- Interestingly, the split between equity and non-equity assets is pretty similar today as it was in 1962, with just over 40% of assets in equities.
- The peak of equity allocations occurred in the early to mid 1990s where close to 80% of pension fund assets were in equities, the majority of this being in the UK. This probably marks the highest level of risk that pension funds ran over this period.
- Real estate was actually a very significant part of portfolios in the early 1980’s, up to 20%. It has since shrank and stabilised around a 5% allocation.
- Since index-linked gilts were first issued in the early 1980s these have, not suprisingly, comprised an increasing proportion of bond portfolios compared to conventional gilts.
- One trend that this data doesn’t capture of course is the duration of the fixed income portfolios, which one has to assume has lengthened considerably in recent years with longer dated gilts and the use of LDI
- UK equities have seen a big decline in allocations, relative to overseas equities. This was initially offset somewhat by higher overall allocations to equity, but the decline manifested itself particularly in the years since 2000, when overall allocations to equities also began declining heavily.
Based on this data, UBS have also calculated that the average returns generated by UK pension funds over this timeframe was 10.2% annualized. Impressive, you might think, but compare this to annualized returns on gilts of 8.9% p.a. and cash of 7.5% p.a. suggests that:
- Over 50 years pension funds on average generated returns of gilts + 1.3%
- Over 50 years pension funds on average generated returns of cash + 2.7%
Pretty important to bear this in mind in the context of setting expectations for future returns. If you are involved in a pension fund and are expecting relative returns to gilts or cash far in excess of these it might make sense to question whether this is reasonable.
Of course, past performance is not a guide to the future, but in an industry which frequently draws conclusions or sets assumptions based on statistically very insignificant data sets (performance of a few years, say) a 50-year data set has to be respected.
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