August 03, 2012

Eurozone Uncertainty Takes its Toll on Balanced Pooled Funds' Performance in Q2 2012, says BNY Mellon

UK managers continue to exit European equities as the debt crisis continues; allocations fall to lowest levels recorded since 1996

Index Linked Gilt pooled funds achieved the highest overall return in the last 12 months with 16.6%

LONDON, 3 August 2012 — Statistics released by BNY Mellon Asset Servicing today show that Balanced Pooled Funds had a difficult second quarter of 2012 with median returns sliding back into the red (-2.9%). Balanced Pooled Funds achieved more positive results in the previous consecutive two quarters, however due to the large negative return recorded in the third quarter of 2011 (-12.0%), over a one year period to 30 June 2012 these funds returned -4.1%.

Data from BNY Mellon's Pooled Pension Fund Database, which covers the largest and most representative sample available to UK pension funds' trustees, shows that results for Balanced Pooled Funds were more favourable over a three-year period with these funds returning 11.1% per annum. Balanced Pooled Funds made some small gains over a five-year period with the median fund returning 1.6% per annum; with these results being impacted by the financial downturn during 2008. Over a ten-year period to 30 June 2012, the average fund returned 6.2% per annum.

Continued headwinds and uncertainty in the equity markets has resulted in disappointing returns across each of the key equity sectors, both in the UK and Overseas. UK Equity pooled funds returned -2.9% and were slightly behind the return on the FTSE All-Share of -2.6%. UK Equity funds did, however, outperform Overseas Equity funds which achieved a return of -4.3% during the quarter. Results for UK Equities were also negative over a one-year period with the average fund returning -3.0%, compared with -7.1% for Overseas Equities.

Within Overseas Equities, the weakest results came from European ex UK Equities with a quarterly return of -7.2% which represents an outperformance of 0.6% compared with the FTSE W Europe ex UK Index. This is again reflected in the one year results for these funds with the median fund returning -19.1%.

Commenting on the results, Alan Wilcock, Performance and Risk Analytics Manager at BNY Mellon Asset Servicing, said: "The poor performance of Europe's equities is no surprise, given re-emerging concerns about the financial health of Europe's sovereigns in the second quarter. This, coupled with economic fragility in the US and China, stoked widespread volatility and in turn impacted investor confidence and equity performance."

Returns from other Overseas Equities funds were also negative over the quarter and ranged from -3.4% for North American Equity funds to -6.6% for Emerging Market Equity funds. Many funds were affected by the turbulent market conditions during the third quarter of 2011, which means that over a one year period to 30 June 2012, Overseas Equity pooled fund returns were primarily in negative territory. North American Equity funds provided the only positive return over this period with 3.8%, and other returns ranged from -4.7% for Japanese Equity funds to -13.3% for Emerging Market Equity funds.

Bond returns were once again in positive territory after a brief dip during the first quarter of 2012. The strongest returns of the quarter came from International Bond pooled funds with 3.4%, followed by UK Bond funds with 3.0%. Index Linked Gilt pooled funds also provided positive results and returned 0.7%.

Results for these sectors were also favourable over a one-year period, particularly for Index Linked Gilt pooled funds which provided the highest overall return of this period with 16.6%. UK Bond pooled funds also provided some strong results over a one-year period with a return of 12.6%, followed by International Bond pooled funds with 6.3%.

Property pooled funds dipped into negative territory during the second quarter of 2012 with the median fund returning -0.1%. This is the first time that BNY Mellon's research has recorded negative results for these funds since the last financial downturn which saw property funds post negative returns for eight consecutive quarters from Q3 2007 to Q2 2009.

Weightings in European equities lowest since 1996

As a result of a difficult quarter in the equity markets, BNY Mellon observed a decline in allocations for most of the equity sectors within the balanced pooled fund universe during the second quarter. After a brief period at the start of the year when weightings in UK Equities increased slightly, the second quarter saw holdings in equities drop from 39.5% to 39.3%. This was a result of poor relative performance and managers withdrawing from this area.

Continued poor relative performance of European ex UK Equities has seen holdings in this sector fall from 10.7% to 10.3% during the last quarter. This is the lowest weighting BNY Mellon has recorded for this sector since 1996. Due to a combination of poor relative performance and managers moving away from these sectors, BNY Mellon recorded a decline in allocations to both Japanese and Emerging Market Equities during the second quarter. By contrast, assets held in North American and Pacific Basin ex Japan Equities remained static over this period.

The opposite was true for the bond sectors and BNY Mellon notes asset allocations to both UK and Overseas Bonds increased by 0.3% within the balanced pooled fund universe during the second quarter. Within UK Bonds, allocations to Corporate Bonds increased by 0.5% to reach the highest weighting we have seen for this sector, of 4.9%. According to BNY Mellon's data, holdings in Index Linked Gilts increase during the quarter, by 0.2%, which was as a result of managers moving into this sector.

During the second quarter, Cash benefited from a boost in weightings, from 7.0% to 7.3% which was as a result of positive performance relative to other sectors, and managers moving money into this area. This was also true for Property, which saw a small increase in weightings of 0.1% boosting end of quarter weightings to 0.8%.

Commenting on these changes, Alan Wilcock said "Question marks continue to cast a shadow of uncertainty over the future for the Eurozone. Uncertainty reduces investor confidence and it is therefore not surprising to see that managers continue to reduce their exposure to European equities as the European debt crisis rumbles on."

BNY Mellon Asset Servicing's Pooled Pension Fund Database covers the largest and most representative sample available to UK pension funds' trustees. BNY Mellon Asset Servicing currently covers 44 separate asset managers who manage over £371billion in pooled funds, both balanced and specialist.

BNY Mellon Asset Servicing offers clients worldwide a broad spectrum of specialised asset servicing capabilities, including custody and fund services, securities lending, performance and analytics, and execution services.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $27.1 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.5 trillion in outstanding debt and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Additional information is available on or follow us on Twitter @BNYMellon.

This press release is issued by The Bank of New York Mellon to members of the financial press and media. All information and figures source The Bank of New York Mellon as at 30 June 2012 unless otherwise stated. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818. Branch office: One Canada Square, London E14 5AL. Authorised and regulated in the UK by the Financial Services Authority.