Nearly two out of three UK pension fund managers plan to retain or increase their current exposure to fixed income over the next three years despite uncertainty about the prospects for the asset class, research from Aquila Capital has found.

According to the survey, 34% of 118 pension fund professionals plan to moderately increase their exposure to fixed income and 31% intend to retain it at current levels over the next three years, while only 26% said they are likely to decrease it, with 20% intending to do so moderately.

In addition, 53% of respondents reject the idea that a 'great rotation' of investor capital from bonds to equities is taking place, with 15% seeing a rotation and 32% are uncertain.

These figures on exposure to fixed income exist despite the fact that 66% of respondents described this asset class as 'challenging' or 'very challenging'.

Respondents cited that the key challenges to fixed income were rising interest rates (79%), assessing credit quality (74%), low yields (72%), the threat of inflation (72%) and achieving sufficient diversification (70%).

Aquila Capital managing director Stuart MacDonald said: "As our research shows, UK pension funds do feel challenged by the fixed income market, especially by the prospect of interest rate rises. Yet most of them plan to retain or even increase their exposure to it."

First published 16.07.2013

monique_simpson@wilmington.co.uk