The UK's smaller pension funds are more exposed than others to market volatility linked with the forthcoming EU referendum, according to new research.

The research, which highlights the impact of the negative interest rates in force in some areas, is the latest Annual Asset Allocation survey by Mercer.

The survey gathered information from nearly 1,100 institutional investors in 14 countries, reflecting assets totalling around 930billion euros.

It shows smaller pensions funds are more exposed to movements in the country's equity markets and the pound, which are likely to follow the referendum result.

Nathan Baker, principal in the consultancy's investments business, said: "Although it's not possible to know now with any certainty how the referendum will impact portfolios, a typical small UK plan is more UK-centric, more exposed to movements in sterling versus other currencies, and is managed in a less dynamic fashion."

He said within bond portfolios there had been a shift away from low- or negative-yielding domestic government bonds towards higher-yielding non-domestic and/or corporate bonds – and that the rise in the price of some bonds in market trading has resulted in them offering negative yields.

Funds may buy such bonds in search of safe havens or because their mandates require them to invest in certain asset types.

Governments in countries such as Switzerland and Japan have recently issued bonds which were set to repay less at maturity than investors paid for them following moves by central banks to cut rates to below zero per cent to encourage investors to spend more, Baker added.

"Institutional investors have been taking a long-term view in relation to emerging markets, in contrast to the behaviour of retail investors since 2013," he said.

Mercer's report described 2015 as bringing political uncertainty, unconventional policy from central banks, and bouts of market weakness and that 2016 looks set to bring "more of the same."

"The sell-off in equity markets in August 2015 was repeated early in the new year; Japan has followed the Eurozone into negative interest rate territory; and the potential for 'Grexit' has given way to the possibility of 'Brexit'," the report said.

"Several 2015 European elections returned equivocal results, such as Spain, and this year promises a US election like no other."

First published 16.06.2016

Lindsay.sharman@wilmingtonplc.com