The results of a Mercer Investment Consulting survey on asset allocation, covering 651 pension funds across Europe with assets totalling €423bn, concludes that there has been no significant shift to equities by pan-European funds in the past year.
Additionally, UK funds – typically heavier in their equity bias than most European funds (61 per cent of total asset allocation against 42 per cent for Europe ex-UK) – have increased exposure to bonds for the fifth year running, averaging 36 per cent of total asset allocation, compared to 31 per cent in 2003. Consequently, equity allocation by UK funds has seen a cumulative 7 per cent fall in five years, despite the strong performance the market during this period.
In continental Europe, exposure to non-traditional assets continues to increase. This includes property, cash, hedge fund strategies and private equity. Irish, Dutch and Swiss funds increased exposure to these assets over the year, while Spanish pension schemes actually reduced exposure from 22 per cent to 19 per cent.
Significantly, private equity as an asset class holds more sway within non-UK funds than UK funds. Exposure to private equity increased from 4 per cent to 7 per cent in the past year for European funds, whereas UK funds attributed just 3 per cent of their assets to this alternative product.
There is a similar pattern for hedge fund allocation, with the proportion of funds exposed to strategies 50 per cent greater outside the UK than within the UK.
According to Mercer, Dutch schemes are most at ease with allowing managers to use credit default swaps, interest rate swaps, high yield bonds and emerging market debt to actively manage their liabilities.
Property, for both mainland Europe and UK pensions, remains the most established holding after bonds and equities, though exposure is over double for European funds compared to UK funds. Irish and Dutch schemes are leading the charge into international property. However, for both UK and non-UK investors, allocation is unlikely to pick up in non-traditional assets like infrastructure or timber.
There will be an expected focus on liability management for all the funds surveyed in the coming months, with an emphasis on using swap overlays and fund-specific benchmarks for bond mandates, Mercer said.
A separate report covering the asset allocation for US pension funds and endowments has found, similar to Europe, growing interest in shifting resources to the alternatives space.
The Greenwich Associates’ survey, covering around 1000 funds, estimated over a third (36 per cent) of US institutions invested in hedge funds. Endowments are the biggest users, with 75 per cent reporting that they invest in hedge funds.
“The institutional use of hedge funds will grow in coming years,” said Chris McNickle, Greenwich consultant. In contrast, allocations to private equity, at 3.8 per cent of total asset allocation, remain “chronically underinvested”.
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