Pensions Endowments and Portfolios
“Only when the tide goes out do you discover who's been swimming naked” is one of Warren Buffett’s more famous quotes.
The recent market volatility in bonds and listed equities is, as always, uncomfortable. Especially for those who must mark their portfolios to market every trading day.
The UK Department for Work and Pensions published an interesting paper last November examining the UK pension industry. It was a measured attempt to consider how, why and if UK pension funds could or should invest in UK infrastructure projects.
We were interested to note that the asset allocation of the UK defined contribution pension sector has barely changed over the past decade. Exposure to equities remains steady at 70% with a further 20% allocated to government and corporate bonds. Property and cash (both 2%) and ‘other’ account for the balance. A survey of UK defined benefit pension schemes (using local Government Pensions Scheme data) showed a slightly different asset allocation: 50% in equities and 17% in government and corporate bonds. Infrastructure and property totalled a further 15%, private equity and debt 10%, with 8% in ‘other’.
In 2022, US Fortune 1000 company pension plans allocated approximately 30% to equities and 55% to debt instruments while alternative assets (‘other’) made up the balance at 15%. A reversed bond/equity exposure, but not that different to the UK pension fund allocations in terms of the liquidity of the portfolio.
Not so for the average endowment fund asset breakdown of 658 participating US colleges and universities. As of December 2024, just over 30% was allocated to equities and 10% to fixed interest. Alternative investment strategies – without daily liquidity - accounted for the balance. Endowment funds are not pension funds, but it is striking that 60% of their $875bn in assets are illiquid with listed equities and bonds having to take the strain of any cash requirements.
To quote Jefferies’ Chris Wood “it shows the insanity of the obsession of defining volatility as ‘risk’ (the dreaded VAR calculations) which obviously means that securities traded every day are going to look ‘riskier’ than assets that are not marked to market”
As now, and in previous periods of extreme volatility, pricing and valuation anomalies proliferate.
It is a time for active managers to capitalise on opportunities in both the more liquid equity and bond markets.
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