Pension schemes may need to rebalance their portfolios to ensure they meet their long-term strategic objectives, amid the market volatility, according to new analysis.

According to research by Stamford Associates, schemes could find that their asset allocations may not reflect their risk/reward objectives going forward, following the severe equity and bond market dislocations experienced in recent weeks.

The potential to drift from the planned strategic allocation will be higher when asset movements are less correlated and when volatility is elevated. Similarly, a longer time horizon will increase the likelihood of deviance and the need to rebalance over time, said Stamford Associates senior investment consultant, Andrew Downes.

Instead, investors should consider rebalancing their portfolios, avoiding inertia or deliberate market timing behaviours, and the potential shortcomings of both, he said.

“Without such a discipline the trustees are likely to jeopardise the long-term strategic asset allocation decision as the scheme gradually drifts away from its model weightings, acquiring different risk and return characteristics and becoming deprived of genuine diversification benefits,” he said.

However, he cautioned that overly frequent rebalancing with narrow ranges could be impractical and lead to impairment of investment returns due to the costs of transitioning the underlying assets.

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Published: June 1, 2020
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