Each year Watson Wyatt releases a survey measuring investment performance in Hong KongÆs HK$413 billion pensions universe. 2006 proved a good year for pension fund managers, with lifestyle funds overall returning 22.3%, and those with 80% or more equities content returning 25.8%. Both figures roughly doubled investment returns achieved in 2005.

On a five-year cumulative basis, 2006 saw investments in lifestyle funds return 12.7% overall, handily beating the consumer-price index and salary inflation.

This was a decline against a year ago, however, on the basis of a rolling three-year period. Overall lifestyle funds from 2004-2006 returned 15.8%, while they returned 18.3% throughout the period of 2003-2005. But the important thing for scheme members is that, since 2002, global equity bull runs have allowed fund managers to outpace inflation. In fact, on a cumulative basis over the past five years, funds with more than 60% equities content returned on average over 70%.

Hong KongÆs pension universe consists of Occupational Retirement Schemes Ordinance (Orso) corporate plans (HK$210 billion) and the Mandatory Provident Fund regime (HK$202 billion). Within MPF, companies must offer money-market funds and capital-preservation funds. As these tend to have little to no equity content, they have failed to beat salary inflation.

The survey includes 126 funds managed by 30 firms. So which managers did best? That depends on how they are measured. There is no single best way of doing so, because a measurement tool depends on a schemeÆs particular objectives.

In 2006, averaging all surveyed funds together, the top-three performers were Baring Asset Management (33.1%), Credit Agricole Asset Management (28.2%) and Invesco (27.1%). But on a five-year basis (and Watson Wyatt notes that pension funds should consider manager performance on a longer-term basis), the top three performers were Credit Agricole (17.7%), Allianz Global Investors (14.2%) and Fidelity Investments (13.9%).

This does not mean pension funds should rush out and sign up Credit Agricole, AGI and Fidelity. These figures do not represent a host of subtle details like investment-style drift, team stability and other factors that go into determining whether a manager is worth hiring. Past performance is no guarantee of future performance. But the numbers do show that these firms have, over the past few years, gotten things right.

Nor do returns tell the whole story: at what risk (usually expressed as tracking error against an index) are these investments made? For example, Credit AgricoleÆs five-year per-annum risk was 12.2%. But BNP Paribas Asset Management, although returning only 7.6% over the same period, had a risk level of only 8.7%.

There are ways to take risk into account. One is to look at returns on a three-year rolling basis. In the period 2004-2006, the top three providers were AGI (18.5%), Barings (17.1%) and Invesco (17%).

Another way is to look at risk-adjusted performance in the form the Sharpe Index, which provides a ratio of incremental reward versus incremental risk. On a three-year basis, Schroders, AGI and AllianceBernstein exhibited the best Sharpe Index figures. On a five-year basis, it was Credit Agricole, AGI and Fidelity. This is probably the most rigorous measure.

Watson Wyatt broke out performance data for the four lifestyle-fund categories (defined by equity content versus bonds) and money-market funds. In a nutshell, on a five-year return basis (not adjusted for risk), Allianz Global Investors had the best growth fund and Credit Agricole had the best balanced fund.

Among the more conservative choices, AGI boasted the best five-year performance in both æstable growthÆ and æcapital stableÆ lifestyle funds. And Pimco easily outclassed the competition in money-market performance.