While global investment banks predict that financial market returns will be poor in 2019, you can expect custodians of retirement assets to seek performance by seeking the alpha promised by hedge funds. or by warming up to the British actions battered by the Brexit. You would be wrong on both counts.
Amundi SA, the largest fund manager in Europe, has partnered with CREATE-Research to survey pension managers in the European Union. The survey, released this week, covered 149 plans covering 1.89 trillion euros ($ 2.15 trillion).
When asked what investments, according to their forecasts, will generate the targeted returns over the next three years, the funds were mostly in favor of global equities, which were selected by 64% of respondents. Infrastructure, which has grown in popularity in recent years, came in second and was 58% selected. So, how did the hedge funds behave in the beauty parade?
They were selected by only 3% of survey respondents, ranking them 23rd out of 25 asset classes. Only currencies and gold received less support from pension plan managers.
This is a rather damning indictment for the industry's collective efforts to convince investors that the higher fees charged are profitable. Unfortunately, this skepticism seems quite justified.
In the absence of a rebound in December, the portfolios are about to generate negative returns for the entire year, according to an index prepared by Hedge Fund Research. This will be the tenth consecutive year where pension plan managers would have done better to invest directly in the S & P 500. So, as a guardian of retirement eggs, why would you consider to allocate one of them to the mass of hedge funds?
The € 1,500 billion Amundi-sponsored survey is also a bleak reading for anyone expecting to end the poor performance of UK equities, which have underperformed their peers in recent months.
In the survey, only 5% of reported pension funds ranked the UK among the best performing markets in the next three years, ranking alongside Latin America and beating only Canada. The study notes that uncertainty as to how the Brexit will be resolved means that "the economy will remain gloomy and fragile."
While figures released on Wednesday show that growth in the UK services sector has slowed to its lowest point since the Brexit referendum in 2016, the economy is expected to contract in the fourth quarter. This is not a bullish context for UK companies that depend on domestic demand for their income.
So what does the pension fund buy? Quantitative easing measures distorting the debt market, as sustainable assets are increasingly used as substitutes for government bonds. "It is widely accepted that the traditional 60:40 equity bond portfolio will not meet performance targets," the report says. The survey found that 62% of respondents invest in real assets, mainly real estate and infrastructure, to improve performance in an expected low return climate.
And this could prove fatal to the likelihood that hedge funds will return to fashion. As I explained earlier this week, the biggest risk facing the industry over the next year lies in the unmanageable markets, making it more difficult to produce alpha by active managers. Unless there is a quick turnaround in performance, pension plans will continue to fool them – and they are right to do so.
To contact the author of this story: Mark Gilbert at firstname.lastname@example.org
To contact the editor responsible for this story: Jennifer Ryan at email@example.com
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is an editorialist of Bloomberg Opinion in Asset Management. He was previously head of London's Bloomberg News. He is also the author of "Complicit: How greed and collusion have made the credit crisis unstoppable".
© 2018 Bloomberg L.P.