Recent market volatility has exposed how overweight in equities (and US equities in particular) many UK retail pension investors have become. UK pension investors have been getting a double hit in 2025 from both falling equity markets and a falling US dollar, with markets whipsawing around seemingly at the whim of one man.
Many UK pension investors are now heavily exposed to equities – US equities in particular – with the indices dominated by the US mega cap tech stocks. The table below illustrates this exposure in some of the UK’s biggest retail investment funds.
Retail investors in these funds are generally positioned for equities to outperform bonds and for peak ‘US exceptionalism’. It’s a function of market weighted indices and the fashion for passive investing or index hugging.
A catalyst to market falls
It’s been a rocky ride in the last three months. Fisher Wealth’s Purisima Global Total Return fund has seen peak-to-trough falls of 20%, and St James’s Place’s popular mixed asset Polaris 3 fund (now the UK’s biggest retail investment fund) of 12%.
There is no doubt that Mr Trump’s actions have been a catalyst to market falls, but those falls were only possible due to the relatively high value and therefore general nervousness surrounding US equity valuations.
The chart below highlights the return on the S&P 500 for the next decade, based on its relative pricing to earnings at the point of investing.
History suggests:
- The S&P usually prices between a 10 and 25 CAPE ratio and usually produces an annual return of around 5% to 15% per year.
- Returns are generally lower the higher the CAPE ratio when you buy the index, bearing in mind these are compound annual returns for a decade.
Based on April’s unusually high CAPE ratio of 33, this analysis suggests returns are likely to be 5% per year or lower, with around a 50% chance of being zero or a loss over 10 years. - By contrast, UK investors are currently making real returns after fees and inflation in UK corporate bonds. UK corporate bonds (and higher yield corporate bonds in particular) are the obvious investment asset that gets the retirement investment task done at the minimum amount of risk.
UK corporate bonds offer more reliable returns without taking equity or currency risk. They are almost completely ignored by the big passive and quasi-passive multi asset solutions. Surprisingly to many investors, high yield corporate bond funds have pretty much kept pace with global equity markets in terms of investment returns since the turn of the century .
IA UK High Yield Bond Sectors VS IA Global Equity since the start of 2000
This chart also highlights one of the biggest risks for drawdown investors – return sequencing risk. The 2000s started with a 50% drop in global equities which took three years reach rock bottom and another three years to recover. It would have had a devastating impact on drawdown investors over exposed to equity markets, who would have been forced to sell equities in a market downturn.
Whilst US equity markets are not as highly valued as they were in the ‘dot com’ run up to 2000 (note the same Shiller CAPE ratio peaked at 44 in 1999), there is plenty of evidence to see how US exceptionalism, AI, and the fashion for passive investing drove US stocks to irrationally high values at the end of 2024.
Return sequencing risks are currently high for drawdown investors who are over exposed to global equities.
In conclusion
With gross yields currently around 6% for UK investment grade bonds and 8% for high yield corporate bonds, these can be a core holding for pension investors as they approach and in drawdown. This takes away currency risks, equity market risks and enables investors to not worry about Trumps next move.
Tideway are relatively unique, in offering pure fixed income portfolios for SIPP investors, for ISAs or offshore bonds.
Tideway’s High yield Corporate Bond Portfolio VS IA Global since 30/12/2022
