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Capital Markets

Investment strategy: Equities are the new bonds

Just as Schroders Investment Management joins the ranks of company pension funds to dramatically cut equity exposure, the debate about the merits of such moves is heating up.

In particular, a recent joint Standard & Poor’s-HSBC study argues that equities might be the best match for pension liabilities after all.

Schroders announced in December that it was looking to reduce the weighting of equities in its staff pension fund, but would not confirm precise levels. Instead, the fund manager said that it intended to invest 35% of its £465 million ($826 million) staff pension fund in liability-driven investments and the remaining 65% in a diversified growth portfolio of alternative asset classes, which might include some equities from emerging markets.

Schroders’ announcement came just two months after UK retailer WH Smith announced that it was allocating 94% of its £837 million pension scheme to liability-driven investments. UK pension schemes typically allocate about two-thirds of their assets to equities but more are rethinking their equity weightings. Pension fund consultancy Hymans Robertson expects equity allocations to more than halve over the next 10 years.

Pension funds first began rethinking the orthodoxy of holding most of their assets in equities after the dot com bubble burst and equity markets began a prolonged bearish phase, punctuated by devastating corporate scandals. Disillusioned equity holders scrambled to replace their holdings with corporate bonds, which seemed a safer bet that better matched their liabilities.

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