EUROPE- Continental European institutions such as insurance companies and pension funds are continuing to move out of equities and into bonds and alternatives in a bid to provide them with incremental returns according to research by Greenwich Associates.
Earlier this year, Greenwich Associates conducted interviews with professionals at 310 of the largest pension funds based in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland.
Its findings show that since the end of 1999, the proportion of equities in continental institutional portfolios has fallen from 36% to 30% and that portfolio managers expect to continue cutting equity allocations. The biggest drop last year was in North American stocks.
“Among other things, European institutions are revealing a lack of confidence in the integrity of US accounting standards and the US equities market more generally,” says Greenwich consultant Chris McNickle.
The principal result of investors’ lost confidence in stocks has been a flight to the relative security of fixed income- bond allocations among continental institutions rose six points to 57% of total assets last year.
According to Greenwich, the appetite for alternative investments remains unquenched, despite recent poor returns. While European institutions still invest less than 1% of their assets on average in hedge funds or private equity, nearly half plan to increase their allocation to hedge funds over the next three years while four out of ten plan to increase their private equity holdings.
“Hedge funds and private equity offer the chance for disproportionately high returns, but present their own challenges and risks,” says McNickle.
The report found that European institutions are cutting the amount of assets managed externally but employing more external managers. In the last year assets managed externally have fallen 4% and the number of external managers used has risen from 7.6 to 8.8.
Says Greenwich consultant Berndt Perl: “more investment managers are managing less money, and many individual managers find themselves managing a lot less.”
Despite the dramatic developments in most markets, only 55% of Continental institutions rebalanced their portfolios during the past year. By contrast 80% of large U.S. pension funds took this action, and 77% of them employ specific rebalancing policies.
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