Despite the mayhem this summer caused by AmericaÆs subprime mortgage-fuelled turmoil, which has damaged many fund managers, pension funds have proved resilient.

Carl Hess, practice leader at Watson Wyatt for the Americas, says large US corporate pension fund returns have been satisfactory so far. Year to date to September, median returns have been just shy of 10%, in line with 10-year median returns on an annualised basis. And median returns in the third quarter of 2-3% have proven decent if not spectacular, because pension funds have little exposure to dodgy CDOs.

The distribution of returns has also been in line with historical averages û meaning the portion of pension funds out-performing or under-performing the median has remained consistent.

But he says risk allocations have changed over the past few months. ôItÆs time for pension funds to reaffirm their risk budgets because the implied volatility in fixed-income and equity markets has risen,ö Hess says. ôThese are now 25% higher than when investors fixed their risk budget three years ago.ö

Revisiting risk budgets is prudent now also because the markets now may offer buying opportunities, although he does not believe credit markets are as attractively priced as their widened spreads might suggest.

Watson WyattÆs model portfolio had almost zero weighting for credit over the past 18 months. Option-adjusted spreads in instruments such as credit, mortgage-backed securities and high yield bonds show credit is now more attractive û ôBut weÆve seen better pricing,ö Hess says. ôThe market has gone from horrendously unattractive to ækeep an eye on itÆ. It would be dangerous to think you can call the bottom.ö

Hess made his comments yesterday in Hong Kong to an audience of local pension funds and money management executives. A quick electronic poll of the audience revealed local attitudes are in line with conventional wisdom elsewhere.

When asked if the subprime crisis will hurt investment returns this year, most people, 44%, say they expect returns to suffer by 25-100 basis points, and 11% expect returns to suffer by more than 100bps. But 30% say it wonÆt affect their portfolios and 15% say it will help returns.

Regarding the US economy, 42% say they are confident (60-90% likely) of a recession. Most people sit on the fence: 27% say there is a 10-40% chance of a US recession and another 27% admit itÆs 50/50. Only 4% say they are ôcertainö there will be a recession in the US but none said it is very unlikely (less than a 10% chance).

This fear does not extend to the wider world: no one says they are certain the global economy will tip into recession; no one gives this a 60-90% chance of happening. The majority of investors, 62%, say there is a small chance (10-40%) that AmericaÆs problems will lead to global recession, while 17% give it a 50/50 chance; but 21% say the odds of this happening are under 10%.

Hess says he is not surprised that one in six expect the subprime crisis to boost their returns this year. He believes pension funds can come out winners from this, provided they have a good governmental structure that allows them to adjust their risk budgets and tweak asset allocation and manager selection in a timely manner.