UK – Russell/Mellon CAPS, reporting a weighted average return of 16% for UK pension funds in 2003, says more funds are opting for the passive management of assets.

The number of funds with a passive element rose to 32% at the end of 2003, up from 28% a year before. Ten years ago the figure was three percent. But the proportion of total assets in passive mandates fell to 15% from 17%.

“There is no sign of abatement in terms of the number of pension funds going down the passive route,” said the firm’s research and development director Alan Wilcock at a briefing to present CAPS' annual pension fund returns.

Russell/Mellon CAPS said the three-year weighted average return is -2.7% while the five-year return is 1.8%. The median return was 16.9% over 2003 – which the company said indicated that smaller pension funds generally performed better than larger funds.

The 2003 return was boosted by a recovery in equities markets. “The main story here is the strong performance of equities,” said statistics manager Daniel Hall. A total 68% of fund assets were invested in equities, little changed from before.

The report found a rise in pension fund activity, defined as new asset portfolios, closed portfolios or change of investment manager. This measure was up to 29% from 25% a year before. In 1990 this measure was 10%. “There’s a lot more activity going on,” Wilcock said.

Sixty-one percent of funds had more than one asset manager, up from 53% at the start of 2003. Funds had an average of 3.5 asset managers.

Funds’ allocation to UK equities fell to an “all-time low” of 41.5% from 43.5% a year ago. The allocation to overseas equities was at a record 26.7% from 25.1%.

The bond allocation was broadly stable at 19.4%, though UK government bonds were up to 19.4% from 18.2% while overseas bonds fell to 1.1% from 2.1%.

The report found that 85% of funds now have specific benchmarks, compared 77% a year ago. In 1990 four percent of funds had them.

Wilcock said alternative asset classes such as hedge funds saw more coverage in the press than real activity – though the introduction of longer-term mandates might see a pick-up in numbers.