By Ruth Alexander Property is set to outperform bonds and should boost pension fund performance, ac...
By Ruth Alexander
Property is set to outperform bonds and should boost pension fund performance, according to Felix Caulfield, director of Clerical Medical pension funds.
The Clerical Medical Mixed With Property fund of funds is currently favouring property holdings and UK equities over bonds.
Caulfield said: "In a diversified portfolio, property is a strong asset as it is not as dependent on the gyrations of equity markets. At the moment, the balance between supply and demand is favourable.
"Property is presently yielding 7% per annum, which compares favourably to the current bond yield of 4.5%. Property has been the star performer of the year and will practically guarantee a double-digit graded return over the next few years."
The fund is overweight in property, holding 3.2% in property, compared to the benchmark of 1.2%. He said the UK market's steady growth, low interest rates and low inflation is supportive to equity prices, while bonds are not offering good yields.
The fund of funds has a 9.4% exposure to bonds, compared to the benchmark weighting of 12.3%. The fund allocates 5.9% of its portfolio to UK bonds, while the benchmark allocates 7.4%. No index linked bonds are held in the portfolio, while the benchmark is 0.4% while the cash position is currently at 4.4%, 0.9% lower than the benchmark.
The fund of funds is 1.5% overweight in UK equities, holding 56.4%, compared to the Caps benchmark's 54.9%. The UK Equity fund, managed by Roisin Magee, forms the largest proportion of the portfolio.
Magee's UK equity fund is run with a bottom up approach, Caulfield said, noting the fund manager aims to identify mis-priced assets. He said: "We are not interested specifically in either growth stocks, cyclical stocks, large, mid or small caps. The current volatility in the market means that it is very important to run diversified portfolios."
The Clerical Medical UK equity portfolio has an overweight exposure to the gas distribution sector and is 1.8% overweight in Shell in particular. Reed International, the business publishers is also a large holding, as is the Royal Bank of Scotland. Caulfield said RBS' acquisition of Natwest was a profitable move that has led to the stock's good performance.
The Mixed With Property fund of funds is overweight in Europe by 0.5%. Caulfield said Europe is an attractive area for investment because it is displaying a reasonable rate of growth, which should support equities over the long term. He added that the recent pension reform proposals should boost demand for equities, European institutions having traditionally been more bond-orientated.
With a weighting of 26.6%, the fund of funds is also overweight overseas equities by 0.5%.
Caulfield favours Japan as an area for investment, saying its economic environment remains positive and its corporate restructuring is continuing. He is less positive on North America, moving 0.5% underweight the region. Volatility of the US market and the earnings disappointments of recent months has caused the group to be cautious but Caulfield said the fund is not greatly underweighted in this area as the slowing of the US economy should provide a positive backdrop for the US equities market.
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