Tue. Jan 18th, 2022

Your Lex column on UK income funds (“UK stock market stagnation: income funds are too small to be T-Rexes”, Lex, FT.com, 6 January) showed that defined benefit pension funds reduced their exposure to equities – UK and non-UK – from around 70 per cent of their funds in 2000 to below 20 per cent now, with a corresponding increase in their fixed income holdings .

It is often thought that equities outperform fixed income over the long term, so a move in the mix could imply that these pension funds have underperformed. However, some studies, including one by Wharton professor of finance, Jules van Binsbergen, show that this is not the case.

The big problem now is that the high returns on fixed income have come over the last few years due to interest rates falling to nothing and thus bond prices rising. From now on, however, there is no room for any further bond price increases, so logically pension funds should reverse this move and reallocate it to equities.

Will it happen – and if it does, will the additional flow of money to stock markets support or even improve what many see as already protracted stock valuations?

Neil Austin
Wadhurst, East Sussex, United Kingdom

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