Gilt demand outstrips supply, says Russell Investments
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Despite demand for UK gilts reaching “unprecedented levels”, the supply of longer-dated and inflation-linked gilts has failed to keep up with demand, according to Russell Investments.
Pension funds in particular should look beyond the short-term volatility and instead focus on a range of alternatives, in light of the gilt shortage.
Pension funds own approximately one-third of the gilt market and remain in competition with insurance companies, other financial institutions, overseas buyers, individuals and the Bank of England, says John Stannard, head of consulting Europe, Middle East & Africa at Russell Investments.
Stannard says: “We believe that it’s time to look beyond a focus on minimising short-term funding volatility.“Of course liabilities should remain centre stage when determining the investment policy but we believe that investment-focused time is better spent on reviewing opportunities in the growth portfolio than fine-tuning the de-risking strategy.”
Stannard says risks, such as interest rate risks, that “cannot be eliminated” should instead be offset with risks that stand a greater chance of reward.
He adds: “Some alternatives will be held for return (e.g. private equity, and perhaps commodities and hedge funds), and others for their cash-generating qualities (e.g. infrastructure and non-domestic sovereign debt).
“Such portfolios should be dynamically managed to vary exposures to key risks as market conditions evolve.”
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