Launched in 2003, Norwich Union's Euro With-Profits fund has been increasing its equity weightings, as Kira Nickerson reports
Equity weightings within the Norwich Union (NU) Euro With-Profits fund have been increased gradually over the past three years moving from a 37% weighting at the end of 2004 to over 47% as at the end of 2006. At the same time cash weightings in the fund have been reduced from some 11% to under 5%.
It is not just the amount of equity exposure in the fund that has been increased. The fund's exposure to this asset class has also been broadened out over the past three years, moving from just a 4% weighting to international equities, with the majority in European stocks, to 11% in other stock markets. With 36% of the fund positioned in European companies, the vast majority of equity exposure remains in that vicinity, however the fund also now features a 1% holding in emerging markets, 1.9% in Asia Pacific, 0.6% in North America, 6.2% in the UK and 1.3% in Japan.
At the same time weightings in fixed interest in the fund have, in the main, stayed fairly static over the past few years. At the end of 2004, the Euro With-Profits fund held just 1% in international bonds but had 17% in corporate fixed interest and a further 19% in the relatively safe European sovereign debt market. This compares to the fund's latest asset break down which shows a total fixed interest exposure of 32.2%, with no international weighting and closer to 15% in corporate with the remainder in European government bonds. According to the managers of the fund, NU's investment arm Morley, performance of European bonds of late has been poor, particularly for European government bonds which have been affected by the rising interest rate environment, although corporate bonds have fared better due in part to the improving global economic prospects.
Having just launched in April 2003, the €92.5bn Euro With-Profits fund is predominantly accessed via investment bond investments and makes up a portion of the overall NU With-Profits portfolio. Both the Euro version and the main NU with-profits fund are jointly managed by Morley and NU with the asset allocation split decided by the group's actuarial team, headed up by Tony Spiers.
Norwich Union International features three currency-class with-profits vehicles: sterling, dollar and euro, all of which invest in the larger NU with-profit fund. The assets backing the euro and US dollar funds are managed separately from the broader with-profit fund assets as they have different asset allocations due to the currency and geographical focus of these funds. For example, the sterling version has some 43% of assets in UK equities and more than 20% in property. That said, according to NU, the euro and dollar funds are still in essence managed in the same way as the sterling portfolio, meaning the allocation between the asset classes is determined by the actuarial team with the management of those defined asset classes then handed to Morley.
According to the group, while performance in the portfolio depends on the type of investment that links to the fund, a return before tax of 11.8% was achieved in 2006. At the same time the current annual bonus rate on the euro with-profits sits at 4.75%, up from 4.57% in late 2003 to 2004 but at the same time level since then. However, final bonuses on the Euro With-Profits fund have fallen steadily - dropping from 24% at launch in 2003 to 18% in 2004 and 9% in 2005. While the rate of 1.75% for the past two years looks extremely low by comparison, this figure is applied on a pro-rata basis in the first year and is no different than the rates available on the dollar or sterling versions of the with-profits fund.
Recent performance in the fund has been attributed to the strength in European equity markets on the back of general investor optimism sparked by the trend in merger and acquisition activity, according to Norwich Union: "Shares reacted to growing evidence that the pace of domestic expansion within Europe was quickening, with rising interest rates failing to reduce demand for stocks. Chemicals, construction and building materials were among the best performing sectors, while the oil and gas sector fell back driven by recent falls in crude oil prices."
Strong demand from property investors continues to drive that section of the market forward, although the group notes there are changing opportunities within the property sector. The Euro With-Profits fund has a current property weighting of close to 16%, a weighting not too far off from where it was just shortly after the market recovery as at the end of the 2004 calendar year when the fund had 15% in property.
Property is probably the asset class for which Morley is best known in its management, having several pooled property funds as well as offering one of the largest retail property funds in the market, plus it has undergone recent strong expansion into the European property market. According to Morley there has been a shift in the best performing sector, with retail property, like shopping centres, being overtaken by offices, particularly in the West End and City areas of London. "The recovery in the office market is being driven by strong demand from the financial and business services sector. There is also an expectation of further rises in office rents."
According to the Spring 2007 outlook from Morley's European property team, headed by Ben Stirling, property continues to offer the possibility of strong returns. This is despite the fact, he notes, that rising borrowing costs due to a higher interest rate environment alongside declining property yields has weakened the valuation case for European property.
Aided by a strengthening Euro-zone economy, occupier markets are generally on an improving trend with rental growth in the office sector strengthening in aggregate as an increasing number of centres begin to record rental uplifts and retail sectors are seeing steady increases in rents, he points out. "Nonetheless, despite improving occupier markets, yield compression remains the key driver of above-trend property returns. The fourth quarter saw further yield compression in all sectors. Bond yields and borrowing costs have risen in recent months however, weakening the valuation case for property and reducing the scope for further significant yield compression. Income growth will become an increasingly important part of property returns going forward," he says.
More broadly, Morley's June economic outlook for the markets highlights the continued inflation concerns in the UK market, with further monetary tightening expected in this region and growth expected to moderate, but not collapse, going forward. While there are fewer inflation concerns for the Eurozone, Morley strategists note the ECB remains in hawkish mood with rates look set to rise to 4.25% in September with the possibility of another increase before the end of the year. Outside of Pan-Europe, the group notes fiscal policy is also playing a strong role in the fortunes of the Japanese economy where the government looks set to return fiscal and monetary policies to a more neutral position, meaning tax hikes, expenditure cut backs and higher interest rates n
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