According to a report by Greenwich Associates, while investors have been saying for the last three years that they aim to reduce their holdings of cash and government bonds and shift into equities, talk has not been translated into action.
Allocations to government bonds which represented 27 per cent of European institutions’ assets at the end of 2002, had increased to 29 per cent at the end of 2004.
Cash and short-term investments which amounted to 7 per cent in 2002, still represented the same percentage of total assets at the end of 2004, while allocations to equities have remained unchanged at 22 per cent for the last year.
Institutions are also doing little more than talking the talk when it comes to alternative assets. Investors who had firmly indicated they would be boosting their alternative investment portfolios have failed to do so. Allocations to hedge funds and private equity have remained flat at about 1 per cent of assets for each of the past three years.
And now that hedge fund returns have declined, Greenwich found that the proportion of European institutions planning to start using hedge funds dropped from 19 per cent in 2004 to 8 per cent in 2005 and the proportion expecting to hire a hedge fund manager had fallen from 23 per cent to 8 per cent.
The report reveals that solvency ratios at European pension funds continued to deteriorate in 2005, heightening the need for improved returns on investments.
Greenwich consultant, Berndt Perl, commented: “Institutional investors in Continental Europe find themselves caught between the need to generate additional returns from their investment portfolios and the implementation of IFRS/IAS rules that seem to penalise risk-taking.”
A quarter of Continental European institutions have adopted the new accounting standards and another 10 per cent plan to do in the next 12 months, says the report.
The necessity of marking to market has led to the proportion of Continental European institutions which use absolute return strategies to rise from 49 per cent to 56 per cent in the last year.
The pessimistic outlook for the business prospects of hedge funds is reinforced in a study by hedge fund newsletter EuroHedge, which finds that the rate of growth in the European hedge fund industry slowed considerably in the first half of 2005.
Total assets rose by 9.4 per cent from $255bn at end-December 2004 to $279bn at the end of June. By comparison, European hedge fund industry assets grew by 50 per cent in the 12 months to the end of December 2004.
EuroHedge partly attributed the slowdown to the relative maturity of the US and European industries against the more nascent Asian hedge fund industry.
On a more positive note, Russell Investment Group reported in September that between 2003 and 2005, the proportion of European institutions using hedge funds increased from 21 per cent to 35 per cent.
HS
