Not a good time for interest rate matching - IPE survey

EUROPE - Now is not a good time to use assets to match interest rate risk in a liability-driven investments (LDI) strategy. Bond yields are too low and assets are better employed seeking yield elsewhere, according to 61.5% of pension funds responding to an IPE survey.

Just over a fifth of respondents said they believed it was a good time to use matching assets but added they would use swaps to avoid having to hold too much government bond risk.

Two pension funds said they felt this is not a good time to apply the strategy, adding that their sponsor could not afford to take active risk against liabilities.

Only one respondent said now was a good time to use assets for interest rate risk matching.

The 62% majority of respondents said they are not explicitly aiming to match interest rate risk with assets, compared to 31% of respondents for whom hedging is part of their interest rate risk.

Only three schemes - two Dutch and one Danish - said they were hedging 100% of their interest rate risk. And the hedging rate varies from 30% for a Latvian fund to 85% for a Danish fund.

With the exception of a few pension fund responses, most asset classes - ranging from global equities to infrastructure - are fairly valued, according to the majority of respondents.

Emerging market equities were perceived to be undervalued by 37.5% while almost 42% of respondents deemed structured credit as either undervalued or overvalued. 

Almost 62% said they regarded domestic 10-year government bonds as overvalued, and close to 57% said they felt domestic inflation-linked bonds were overvalued. Global real estate was also perceived to be undervalued among 59% of those questioned.

But certain types of equities, real estate and structured credit, private equity, high yield credits, hedge funds and commodities were classed as offering compelling value to some pension funds.

The Off the Record survey on the Outlook for 2010 was conducted for IPE's January issue. A total of 46 pension funds, with around €137.9bn in invested assets, responded to the survey.