The European Institutional Asset Management Survey (EIAMS) this year celebrates its tenth anniversary. Invesco commenced the survey in 2000 and three years ago asked IPE to undertake it.
This year's survey received responses from 121 investors from 25 countries, with total assets under management of €333bn. This represented a slight increase in numbers from 117. However, the asset levels were below those recorded by last year's respondents at €477bn. Nonetheless, 60% of the previous year's respondents completed the survey. Over half the funds were small (under €1bn), 14 were large (over €5bn) and 38 were in between. The average size of fund responding this year was €2.8bn, compared with €4.1bn last year.
The greatest number of responses again came from Benelux and Great Britain & Ireland, with 30 and 23, respectively. With two or more categories to choose, almost 98% of respondents described themselves as pension funds and 9% also as insurers.
The full survey report can be downloaded at IPE.com/whitepapers free of charge. Last year's survey has been downloaded from the website over 5,600 times, indicating a high level of usage of the survey by the European institutional investment community. The survey was undertaken early in 2010.
Recession overhang: Investment horizon remains at the forefront for internal assets, as damage limitation to portfolios stayed key. Relative performance still holds sway for external assets. Relative returns continue to be seen as more important than absolute returns, but now only marginally so for internal assets. Relative risk is again in second place for external assets, while absolute risk for internal assets has risen dramatically in importance.
Investment of assets
Green shoots of equities seen: Fixed income remains the safe haven of choice for investors, but equities and alternatives are showing signs of recovery in interest as the drivers to rebuild portfolios. Surprisingly, it is the smaller funds leading the way here. The overall allocation to cash has halved. Any increase in equity holdings is seen as occurring most in home markets and outside Europe. All the alternatives are now much more attractive with cash being the big loser.
Sources of absolute versus relative return
Hedge funds sprouting: Hedge funds have emerged from last year's frost to be seen once again as one of the main sources of absolute return. They are now joined, with cash at the top, by alternatives in general and real estate. Equity and fixed income, with all classes in third, are the main sources of relative return. For absolute returns, all sizes of investors have kept faith with fixed income and returned to alternatives, although smaller investors, not unexpectedly, for it was less so for real estate.
What a difference a year makes: Alternative portfolios have more than regained last year's retrenchment, so fulfilling the predictions made by investors in last year's survey, except for commodities which only grew sparingly from a low base. Strong growth is predicted for real estate, its overall share of portfolios having increased for the eighth year in succession. But strong growth is also anticipated for private equity, hedge funds and commodities. Real estate remains most popular with the Swiss, with Benelux now being displaced by the Italians.
ETFs and indices
Small play catch-up: Exchange traded funds (ETFs ) showed a small recovery on the previous year, with Benelux and Nordic investors leading the way. The smaller funds have taken over as the largest users of ETFs. Fundamental indexes were by far the most popular new type of index used, and by more than twice the use of market cap modified in second place. Open-ended mutual funds were the most favoured technique to gain index exposure, displacing futures from last year's first position.
Duration and LDI
The gap narrows: While the overall duration gap remains unchanged, the average for both fixed income duration and actual liabilities shortened by almost 11 months. Except for in France, where the gap doubled, all other countries and regions saw a significant narrowing. LDI strategies were the most popular, being used by over half of investors.
Down but not out: Use of performance attribution has fallen back slightly but remains at a very high level. Investment managers continue to dominate and have increased their market share, together with custodians and external performance analysts, mainly at the expense of internal departments and investment consultants.
One man's meat: Use of consultants has reduced, but remains at over 50%. The French, converts to the cause last year, have fallen dramatically by the wayside, and the Italians have also shown a big fall in usage. Conversely, the British and Irish have resumed their position as the most committed users. Medium-sized funds are now the largest users of consultants, with much reduced involvement by both the larger and smaller funds. Investment advice remains the prime reason for their employment.
External managers: usage
Normal service resumed: External managers more than recovered the ground lost last year, the increased take-up coming from the larger and smaller funds, with the medium funds showing a small decline. Most countries moved further towards external managers, with some retrenchment being shown only by Benelux and France.
External managers: asset allocation
Equities gain ground relatively: There has been a small decline in the switch of fixed income assets to external managers so that it now only marginally exceeds the total for equities. Benelux, Great Britain & Ireland, and Switzerland delegate the most fixed income and equity. The larger funds have reverted to preferring external managers, but the medium and smaller funds remain the biggest users, with the latter now narrowly the biggest users.
External managers: selection criteria
Keep making it clear: Clarity of investment process remains most in demand, followed by performance and risk control, all having shared the top three places for the last six years. More conformity was in evidence on a country basis, although the Germans were more influenced by transparency of fees than performance, and the French valued client service very highly.
External managers: fees
Closing the gap: The ideal of fixed fees has grown substantially for both fixed income and balanced funds, while the clear preference for equities and real estate was for a combination of fixed and performance-related fees. However, the gap between current and ideal has shrunk, mostly for balanced and fixed income. Medium funds have now replaced the smaller funds as being keenest on performance-related fees.
External managers: constraints
Recession cuts restrictions: The constraints most in demand are again benchmarks, tracking error and following a specific allocation of assets. Fewer constraints were rated but the fact that compliance with SRI/ESG guidelines moved up to fifth place, followed by a new question on adherence to UNPRI, indicates that responsible investment may be taking on more importance.
External managers: breaking relationships
For better, for worse: Reported dismissals were the lowest for at least five years, perhaps reflecting the need for stability during difficult times. The French and Italians were the most loyal, with the British and Irish taking the most scalps. Medium funds, followed closely by the larger funds, have again broken the most relationships. The three most critical factors triggering a dismissal remain failures in performance, risk control and clarity, the latter replacing investment strategy or asset re-allocation. However, for both the Swiss and CEE, strategy or asset allocation and cost competition played a much more decisive role.
Other findings: SRI/ESG and Securities lending
SRI/ESG - Green agenda hangs on: Social and environmental values, owners' beliefs and corporate culture were again the main drivers behind the pursuit of SRI/ESG strategies. However, all three indicated declining interest, compared with the previous year, possibly due to the emergence of governance, an option included for the first time, which was supported by one-third of respondents. Corporate governance strategies remain the most popular, but slightly less so than last year. This pattern is followed by all other written policies except engagement strategy, which witnessed a sharp decline.
Securities lending in free-fall: The continuing repercussions of the ban on financial stock shorting, together with counterparty risk, means that both equities and bonds used for securities lending fell by about one half of the previous year's already reduced position.