View from City Road: The never-never flight to gilts

TOTAL returns from UK bonds have outstripped those from UK equities by 30 per cent over the past two-and-a-half years. Yet, despite a great deal of talk, pension fund managers have so far done little to take advantage of the purported greater attractions of gilts.

This was borne out by the survey of pension fund managers published yesterday by Hymans Robertson, the consulting actuaries. Since the end of 1986, the average pension fund's holding in bonds has fallen from 12 to 9 per cent of its portfolio, while its investment in UK equities has increased from 55 to 58 per cent. Yet over the five-year period to the end of last month, UK shares have returned 6 per cent a year compared with 9.5 per cent a year from UK gilts.

The latest data from Combined Actuarial Performance Services, which measures pounds 165bn of pension fund money, offers further support. Pension funds have increased their UK fixed-interest holdings by about another 1 per cent so far this year, helping the Government with its funding requirement. But the money has come from overseas bonds rather than from equities, which remain stable at about 58.5 per cent.

One reason for the inertia may be pension fund managers' fear of being wrong if they were to adopt a radically different stance from their peers.

The life insurers seem to have been quicker to reposition their portfolios, Norwich Union's switch of pounds 2bn into gilts being the best-publicised move. The persistent suggestion is that these changes are being forced upon the insurers by the Government Actuary, who watches over their financial strength. Scottish Equitable yesterday insisted that its investment of nearly 60 per cent of its main pounds 3bn life fund in bonds was made on investment criteria rather than because of any concern over matching its liabilities.

With German (and therefore British) interest rates expected to remain relatively high for some time, the prospects for bonds remain good, with capital appreciation the consequence of rates returning to their long-term norm. But investment managers may already have missed much of the great bond opportunity after five years of bond outperformance.