November 10, 2011

Headwinds in the Equity Markets Push Balanced Pooled Funds into the Red with Returns of -12% in Q3 2011

Bond funds and Index Linked Gilt funds the top performers once again

LONDON, 10 November 2011 — Statistics released today by BNY Mellon Asset Servicing show that results were mixed for balanced pooled funds during the third quarter of 2011 with equity funds struggling and bonds performing well. Against this backdrop of market uncertainty, balanced pooled funds returned -12.0% during the quarter. This swing into the red has impacted the one-year period to 30 September 2011, as any gains made in the previous three quarters were wiped out with balanced funds returning -4.2%.

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 balanced pooled funds did achieve positive returns over a three-year period to 30 September 2011, with these funds returning 6.3% per annum. This represents a real rate of return of 3.4% per annum when compared with the Retail Prices Index.

Balanced pooled funds failed to achieve real rates of return over a five-year period with funds returning 2.3% per annum, compared with 3.5% per annum for the Retail Prices Index. These returns were no doubt diminished as a result of the financial crisis in 2008, which saw these funds post negative returns in each quarter of that year. Returns were however, more favourable over longer term periods with Balanced funds providing returns of 5.5% per annum over 10 years to 30 September 2011.

During the third quarter, UK Equity pooled fund managers returned -14.4% and underperformed the return on the FTSE All Share by 0.9%. UK Equity pooled funds also struggled over a one-year basis, with these funds returning -4.8%. Returns were more favourable over three and 10 year periods with these funds returning 6.3% and 4.7% per annum respectively. The five-year return for these funds was 1.0% per annum, which was adversely affected the by the market turmoil during 2008 and 2009, where BNY Mellon recorded negative returns for five consecutive quarters for these funds. Despite these funds failing to achieve positive results during the quarter, UK Equity weightings within balanced pooled funds increase from 37.9% to 38.2% as managers moved money into this sector.

Results for Overseas Equity pooled funds were also negative during the third quarter of 2011, and on an overall basis these funds provided a median return of -17.2%. Of the overseas equity funds, the strongest performance of the quarter came from Japanese Equity pooled funds which provided a return of -3.4%. By contrast, the weakest performance came from Europe ex UK Equity funds which returned -24.3%, this is perhaps not surprising given the sovereign debt crisis currently affecting Europe. This was reflected in the balanced fund asset distributions where we saw money being moved away from Europe ex UK Equities, with holdings in this sector falling from 13.5% to 11.0% at the end of September.

"The sovereign debt crisis in Europe and global growth prospects weighed heavily on equity markets during the quarter, with high daily volatility and negative returns in all three months of the quarter. UK Bond prices continued upwards providing even lower yields," noted Alan Wilcock, Performance and Risk Analytics Manager at BNY Mellon Asset Servicing.

The strong returns achieved by bond funds and Index Linked Gilt funds during the last quarter, continued into the third quarter with these funds once again proving to be the top performers. Index Linked Gilt funds returned 7.6% during the quarter, and over the year to date returned 12.2% making these the strongest performing funds of the year. UK Bond funds and International Bond funds also performed well during the quarter with these funds returning 3.8% and 5.5% respectively. This was reflected in the balanced pooled fund asset distributions which saw holdings in both these sectors boosted during the quarter as a result of manager movements. Over longer term periods, UK and International Bond funds and Index Linked Gilt funds were among the top performers and over three, five and 10-year periods they outperformed other key funds including balanced pooled funds and UK Equity funds.

During the third quarter, both Property and Cash provided positive returns of 1.4% and 0.1% respectively. Property funds have now provided over two years of positive quarterly returns making this one of the most consistently strong performers over the short term. This means that over a one-year period, these funds provided a median return of 6.9% and were outperformed only by Index Linked Gilt funds. During the quarter we saw holdings in both Cash and Property increase within balanced pooled funds as a result of managers moving money into these sectors.

Survey size
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 52 separate asset managers who manage over £382 billion in pooled funds, both balanced and specialist.

The performance analysis and other information in this press release are based on historical data and are intended for informational purposes only. Past performance is not a guarantee of future performance. This press release does not constitute investment advice, nor is it an offer or recommendation of any security, investment product, service or firm.

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 Asset Servicing offers its products and services through The Bank of New York Mellon and other subsidiaries of The Bank of New York Mellon Corporation.

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