Jonathan Arthur, manager of Deutsche Life's Balanced pension fund, believes staying close to th...
Jonathan Arthur, manager of Deutsche Life's Balanced pension fund, believes staying close to the benchmark will bring investors positive returns going forward. However, he is concerned about the UK Government's long-term finances and their impact on the market.
The £800m fund's aim is to outperform its benchmark by 1% on a rolling three-year basis. Over the last 12 months to 31 March, on a mid to mid basis, the fund fell by 23%, which was 0.5% lower than its benchmark; the CAPS Balanced median. In the five years to 31 March it dropped 2.8%, outperforming its benchmark's return of -3.3% over the same period.
Arthur said: 'In hindsight the fund should have been more overweight fixed interest and underweight equities from September 2000, as investors have seen good bond performance over the past three years but equities have had poor returns.
'If we were more positive going forward we would perhaps go more overweight equities but only by about 1%.'
In terms of UK equities, which are currently 53.5% of the fund, Arthur feels returns are going to be fairly low and expects growth of around 8% per annum before inflation.
'I still think over the short term we are not going to fall into recession but I do feel actual GDP growth will be below the Government's predictions, which I believe are over-optimistic. It is looking for growth somewhere in the region of 3.5% next year but I think it will be not much more than 2%.'
Arthur notes the fixed interest proportion of the portfolio is divided into sterling, index and international linked funds and as at 31 March comprised 17% of the portfolio.
Generally, Arthur said he is positive on the bond market's outlook and thinks interest rates may come down further in the UK and the US. If they do fall, bond prices will go up and people will start to pay a large premium for income, he added. He said: 'I do not think we are going to see a collapse in the gilt market but the UK Government's public finances are deteriorating and the Chancellor's promises of growth are not going to happen. In this case the Government has the option to cut back spending and increase taxation but it will not want to do either of those, so its only other option is to borrow more money.'
With this fund, investors need to look at it from a long-term perspective, added Arthur. He said it may be conservative in relation to its benchmark but it is more active in terms of stockpicking. As at 31 March the fund's top three holdings were BP at 4.3%, Vodafone at 4.1% and GlaxoSmithKIine with 4.1%. He added: 'For 100 basis points of outperformance, by general rule of thumb, 80% of it is down to stock selection while 20% is as a result of asset allocation.'
In terms of the portion of the fund allocation to the Japan, Pacific and emerging markets, which collectively comprises about 9% of the fund, Arthur believes other areas are more likely to develop quicker as regions of the western world, such as Europe, struggle with growth.
He said: 'In the long term if you look at the demographics of Europe, a large problem will be establishing growth, in the far east there is a larger working population and a lower amount of elderly retired people.
Head of UK intermediary distribution
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