The removal of equity risk is in danger of being oversold, Mercer Investment Consulting has said.Despite forecasting lower absolute stock market returns, Mercer contended that most pension funds are just as exposed to interest rate and inflation risk.

Alternative assets are being used increasingly by institutional investors both to enhance returns and diversify investment risk.

Use of tactical asset allocation (TAA) as a total fund overlay is unwise and takes up a disproportionate amount of the total risk budget, according to investment consultants Watson Wyatt.

The increasing split between manufacturing and distribution in fund management combined with growing demand for embedded-advice products are among catalysts that boosted assets in multi-manager products by 32 per cent to more than $960bn (€745bn) in 2004.

Despite indications from the US Securities and Exchange Commission (SEC) that a soft-dollar ban is not on the cards, the proportion of US institutions using soft dollars to pay for research and services continues to decline.

Pension fund trustees have been urged to appreciate the impact of changing economic circumstances on their asset allocation

decisions.

A research study published this month by Edhec Risk and Management Research Centre calls for the hedge fund industry to adopt an investor-driven approach to the packaging of alpha, in contrast to the current manager perspective. This requirement could herald the emergence of new types of offering with characteristics better suited to the expectations of institutional investors, the research says.

A new property investment arm has been created for Crédit Agricole Asset Management through the merger of Uniger and Clam Immobilier.

With assets of €2.2bn, the new entity, called Crédit Agricole Asset Management Immobilier, will have a 15 per cent share of Europe’s property investment fund market.

Remodelled Italian house concentrates its efforts on developing retirement products, asset liability modelling and unconstrained alpha strategies.

The announced take over of Germany’s HypoVereinsbank (HVB) by Unicredito Italiano and the possibility of both companies integrating their asset management divisions shows Unicredito’s commitment to this business.

This attitude contrasts with that of Banca Intesa which has just sold a 65 per cent stake in its fund management subsidiary, Nextra Asset Management, to Crédit Agricole Asset Management. Moreover HVB’s network will bring huge distribution opportunities for Unicredito’s investment arm Pioneer Investments.

Pioneer enjoyed a very good 2004. The firm managed to attract €3.6bn worth of new assets, mainly from investors in continental Europe and the US.

JPMorgan Asset Management invests in emerging markets in good and bad times. CIO Richard Titherington tells Paula Garrido that a country-specific focus is the best approach.

Three successive years of good performance in emerging market equities has served to attract a lot of new investors to a traditionally volatile asset class. While the consensus view is that future returns are likely to be more modest, JPMorgan Asset Management (JPMAM) maintains that there is still good value to be had from what it calls an evolving asset class.

Worrying solvency levels prompted a re-think at the Environment Agency resulting in a shift from UK equities to the global, corporate and SRI arena. Henry Smith reports.

ING Investment Management is channelling its energies into developing a quality international servicing model for its institutional clients before concentrating on gathering new business, CEO Europe Angelien Kemna tells Henry Smith.

A desire to provide a higher standard of service to existing institutional clients has superceded the traditional drive to amass assets under management at ING Investment Management.

According to Angelien Kemna, chief executive officer of ING IM’s European operation based in the Netherlands, institutional investors that lost money when the stockmarkets fell were badly let down by asset managers and consultants who “hid behind benchmarks” and failed to offer appropriate and timely investment advice.

The rejection of the EU constitution in the French and Dutch referenda is of little relevance to the financial markets outside of the possibility of a knee-jerk reaction lower from the euro or occasional increases in risk premia associated with the questioning of the sustainability and direction of the ‘European project’.

We would not expect the EU constitution to be a significant driver of market activity on any short or medium term timeframe.

In the run-up to the ‘no’ votes, eurozone lead indicators turned down again, threatening to scupper the economic recovery that never really was.

Recent bond market turmoil following Ford’s and General Motors’ (GM) credit downgrades has illuminated the tip of the risk posed by the enormous level of leveraged exposure to the corporate bond market.

Given the less-than-transparent state of hedge funds, no-one can say how great the risk is because the exact level of leverage is unknown. However, significant market tremors suggest a full-scale unwinding could turn a retreat into a rout.

Most of today’s hedge funds are betting on complex relationships within and between markets: so-called correlation trades. But most of these strategies have yet to be tested under volatile market conditions.

With strong economic fundamentals and a benign external environment, many investors are looking more at politics for downside risk scenarios. After years of addressing macro-economic imbalances and structural reform, significant segments of electorates are aggrieved at not feeling the benefit.

In particular, in the past few years a number of more populist politicians have come to power. With a raft of elections coming up, including presidential races in Chile in December and next year in Peru, Colombia, Mexico, Brazil, Ecuador and Venezuela, the market is becoming more concerned about lack of popular support for orthodox economic policies.

Some investors and journalists have become very negative about the Japanese economy and the outlook for the Tokyo market. However, we remain cautiously optimistic on both.

The yen will probably remain strong. Japan continues to run up large trade and current account surpluses, foreign exchange reserves remain near record highs, and its higher quality products are competitive in world markets. Look for a sideways-to-higher market before the end of the year. The major risks are likely to be outside factors, such as a weaker-than-expected world economy, a contracting Chinese economy, weak growth in Southeast Asia or sharply lower overseas markets.

Henry Smith reports on the Universities Superannuation Scheme’s decision to stick with equities.

Renewed interest in bonds results in awards to fixed income managers. Paula Garrido writes.

Short-term predictions for the Canadian dollar are cloudy but if Chinese demand for commodities remains strong the long-term picture could be more positive, says Neil Mellor.

Pressure is mounting for pension funds to extract more value from bonds to offset both falling returns and the widening gap between assets and liabilities. Paula Garrido reports.

Disappointing investment returns in the equity markets over recent years have resulted in investors looking at bonds in a different way. Fixed income portfolios are now expected to work harder to generate alpha for the portfolios as well as adding diversification and risk control.

The need to squeeze more return from bonds has developed in parallel with the growing need to bridge the gap between assets and liabilities.

Robeco’s Hattrick strategy offers positive returns in fixed income markets irrespective of interest rates movement. Erik van Leeuwen and Petra Sagel explain.

Many investors are asking themselves whether an investment in fixed income securities is a good idea. Interest rates are low and the return on corporate bonds, the spread, has narrowed considerably. Nevertheless every portfolio should have bonds.

A return to form for large caps has seen investors positively relishing prospects for enhanced future performance. But while some analysts recommend a switch to the large chip league, others think there is still some mileage to be squeezed from a focus on small and mid caps and a mix of equities that always pay dividends. Paula Garrido reports.

Large caps equities are back in the limelight following years of underperformance that led investors to increase their exposure to small and mid caps.

For the past few years, small caps have been giving investors just what they were asking for.

The traditional cap-weighted approach to investment could be complemented by new diversity and non-price concepts.

Market capitalisation-weighted benchmarks have achieved a position in the investment world that is almost unchallenged. Watson Wyatt’s thinking and beliefs start with these indices and there is no reason why this will change. But some critics say that these weighting structures are not the most efficient way to invest.

Outsourcing of asset management mandates to third parties has grown fast across Europe. Nick Phillips and Ingo Ahrens discuss the unique aspects of northern Europe and its responses to the trend.

An analysis of sub-advisory in northern European markets reveals a scenario in which different players in different countries are discussing outsourcing and implementing it through various models. In general terms, the region is a mature adopter of the sub-advisory process.

Single strategy currency management styles can bring hefty losses in high-risk periods but strategies can be improved to offer better performance. W. Parker King explains how.

The launching of an SRI fund of hedge funds shows the ‘quirky’ asset class may finally be going mainstream. Simon Hildrey explains.

Climate change has moved to the centre of the political and business agendas. It will be one of the main issues to be discussed at the G8 summit at Gleneagles in Scotland in July. At the same time global companies, such as General Electric, are committing themselves to environmental goals that go beyond current government regulations.

Axa Rosenberg’s Pacific fund goes after companies in the region’s more established economies, particularly Australia, using a bottom-up stock-picking approach. Paula Garrido explains.

FTSE and ISS solicit industry-wide opinion in order to establish corporate governance rating system.

Almost 90 per cent of respondents in an industry-wide consultation conducted by FTSE, the index-provider, and Institutional Shareholder Services (ISS) said they expect corporate governance issues to grow in importance over the next two years.

The findings came in the process of developing the methodology behind the FTSE ISS Corporate Governance Index (CGI) Series and CGI ratings.

By using these ratings investors are able identify and manage corporate governance risk within their global portfolios.

Chris Gibson-Smith, chairman of the London Stock Exchange (LSE), has warned that the recent spate of proposed exchange consolidations in the US will lead to greater economic competition for Europe.

Royal Bank of Canada (RBC) has joined forces with Dexia to create one of the world’s top 10 global custodians with $1,800bn (€1,400bn) in combined client assets under custody.

A mere handful of listed companies believe that the much touted takeover of the London Stock Exchange (LSE) would be beneficial to them, with a third fearing it would damage their position, a survey has revealed. Increasing listing fees and migration of businesses offshore were also among predicted problems.

Increasing transparency and setting industry standards are among the aims of the recommendations made in the AIMA report on pricing and valuation in the hedge fund industry. Roger Aitken canvasses reactions.

The first global survey of hedge fund asset pricing and valuation practices, published recently by the Alternative Investment Management Association (AIMA), not only provided more insight into the practical issues surrounding valuation issues and the limitations of net asset valuation (NAV) calculation, but also could be viewed as a clarion call to the industry to embrace best practice.

Today, fund performance is no longer the most important competitive advantage, especially in these lean economic times when fund managers are finding it almost impossible to guarantee consistent top performance.

Successful asset managers clearly differentiate their offerings based upon non-performance factors, one of them being effective fund distribution support.

As the first commodity exchange traded fund is launched on Deutsche Börse and SWX Swiss Exchange, Roger Aitken reports on the growing market for ETFs in Europe.

While the market for exchange traded funds (ETFs) in Europe has recently celebrated only its fifth birthday and is dwarfed by a US market dating back 12 years, last month’s launch of the world’s first ever commodity ETF on the Deutsche Börse and SWX Swiss Exchange might prove a defining moment.