At least one Spanish pension fund is already into this game. The âŹ64 billion state pension fund, Fondo de Reserva, recently revealed that they expect to have 90% of their assets tied up in Spanish government bonds by the end of this year, up from about 50% in 20077. Expect this sort of behaviour to spread. It is a gamble many pension providers will be prepared to take, as the alternative is not that exhilarating either. Letâs just hope for the sake of millions of Spanish workers that the pension fund knows what it is doing. Unfortunately, Murphyâs Law has an unpleasant habit of popping up at the most inconvenient of times.
Conclusions
So what are my conclusions? For all the reasons above, I continue to be
bullish on bonds. Remember what I said earlier this year about inflation being difficult to engineer when you need it the most? Unfortunately, this is truer than ever. We could really do with a bit of inflation and the higher bond yields which would probably follow (it would fix an awful lot of problems in the pension industry), but it is when you need it the most that it is least likely to happen.
Another question altogether is, where does this leave equities? I believe it will ultimately be the bond market that holds the answer to when it is time to buy the stock market aggressively again. Long term readers of this letter will know that I have argued for over 6 years now that we are stuck in a secular bear market (i.e. a market characterised by falling P/E ratios). This doesnât mean you canât make money in stocks. Plenty of people do every day. But you need to be selective. Donât buy the market yet. It is still premature. Invest with active managers capable of delivering alpha. The time to buy the market again will probably be when the bond bull finally decides to call it a day. There is only one caveat. Interest rates must go up for the right reasons, but that is a story for another day.
Niels C. Jensen
© 2002-2 010 Absolute Return Partners LLP. All rights reserved.
1 See here for details.
2 âDutch not facing up to pension troublesâ, Financial Times, 27th September, 2010.
3 The solvency ratio is the current value of all assets in the pension fund divided by the net present value of future pension liabilities. When the discount rate is lowered, the net present value of future liabilities rises, leading to a lower solvency ratio.
4 Goldman Sachs Fixed Income Monthly, September 2010.
