Strong performance across most equity markets in 2013 bolstered estimated average investment returns for pension funds in six major markets, delivering a degree of optimism for the year ahead.
“2013 was clearly a banner year for equities,” said John Gruber, head of product strategy for BNY Mellon's global risk solutions group in Boston.
Good performance from U.S. equities in particular, with the Russell 3000 index returning 33.6% over the calendar year, led to four quarters of positive results for pension funds. U.S. funds returned an estimated 13% for 2013, up from 12.4% the previous year, according to data from BNY Mellon Asset Servicing, New York.
The good year wasn't confined to the U.S. The MSCI World index returned 27.4% in 2013, up from 16.5% in U.S. dollar terms for 2012, the MSCI Europe Australasia Far East index returned 23.6%, up from 16.9%.
Unlike in 2012, fixed income was a negative for returns last year. The Barclays Capital U.S. Aggregate Bond index returned -2.02%, after posting 4.2% a year earlier. The Barclays Capital Corporate Investment Grade index returned -1.53% vs. 9.8% for 2012. And while the Credit Suisse High Yield index returned 7.5% for the year, it was a fall from 14.7% in 2012.
U.K. pension funds had a solid year, with Mercer estimating an average 10% return for the year, while the WM Defined Benefit Pension Fund Universe, managed by State Street Corp., showed expected average returns of about 11%.
“Most of that return will have come from equity market performance; U.K. schemes invest around 40% of their assets in equities on average,” said Phil Edwards, Bristol, England-based principal at Mercer. The U.K. FTSE All-Share index gained 21.3% for the year, while the Barclays U.K. Gilt 15+ Year index returned -5.97% in sterling terms.
One fly in the ointment was emerging markets, which shocked investors in 2013 with poor performance after years of positive numbers. The MSCI Emerging Markets index returned -2.4% in U.S. dollar terms for the year, after an 18.6% increase for the previous year.
“Emerging markets were down around 5% to a U.K. investor,” said Mr. Edwards. “Local currency emerging markets debt, which is an area that a large number of U.K. pension schemes have allocated to over the past few years, was down about 10% in sterling terms last year after a few years of strong returns.” But Mercer executives still believe the strategic case for emerging markets assets is strong “and last year's weakness might provide an opportunity for pension schemes that haven't yet added an allocation to do so at a fairly attractive level,” he said.