EUROPE - Liability-driven investment and hedge funds are seen by asset managers as the biggest growth areas for pension funds in 2005, according to a survey by Mercer Investment Consulting.

"Over the next three years, managers anticipate an increased demand for tactical asset allocation and portable alpha investment strategies," Mercer said in a statement. It has surveyed 55 European institutional investment managers with some $10tn in assets under management.

"The biggest growth areas for the pensions industry are expected to be in liability-driven investment and hedge funds,” it said.

"Although the proportion of assets managed on a performance-related basis remains low (less than five percent for over half the managers) such arrangements are likely to become more popular."

"The areas of anticipated growth reflect an underlying belief that returns from mainstream equities and bonds will be modest in 2005 and beyond," said Andrew Kirton, worldwide partner and UK head of Mercer Investment Consulting.

"While we welcome greater emphasis on focused fund management and performance-related fees, the question is whether hedge funds will improve on their distinctly lacklustre performance in 2004."

The managers polled expect equities to return seven percent in 2005, with three percent expected for bonds.

The survey found that 78% of managers think that current levels of corporate governance in the UK are sufficient while 70% say more could be done in the rest of Europe.

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