EUROPE - Europe's pension funds will spend 2012 worrying about downside risk as the eurozone begins to fracture, economies falter and interest rates remain anchored at, or fall to zero - while government bonds look wildly overvalued and the only safe haven left is a family, according to some. Those are the sobering findings of our latest 'Off the Record' survey, due to be published in the January 2012 issue of IPE.
The major perceived "credible" threat to the global economy and financial markets in 2012 is clear. The survey was taken before the announcement of Kim Jong-il's death, but despite ongoing unrest in the Middle East, growing Israeli-Iranian tensions and a breakdown in US-Pakistani relations concerns have become very parochial, even compared to last year's survey results.

Geopolitical risk and bursting bubbles in China received no votes, but more than 90% suggested that the break-up of the eurozone would begin to look inevitable, contagion would spread decisively to core eurozone countries and populism would take hold in politics.
"The risk of a break-up has consequences impossible to oversee and hedge," said one Dutch corporate fund. "It is not unlikely anymore." A Norwegian fund disagreed, saying that the chances were not above 50%. "But the potential consequences overshadow everything else," it added.
One UK corporate noted that binarism in political rhetoric and positioning was already having an effect. Bank bonus structures do "untold damage" to trust in the banking system, it said. "If £119kpa is the UK level of 'Rich' (i.e. the top 1%), what percentage of the City expect more?" But at the same time union leaders in the "over-indulged Public Sector" are guilty of perpetuating "luddditism and class structures", it continued.
Some observe that this poisonous political atmosphere could stifle any chance of economic or financial recovery, and point to the increased sponsor covenant risk that could result.
A Finnish pension insurance company spoke for many: "Year 2012 will be volatile and recession is unavoidable."
While the majority felt that diversification becomes more important than ever in such an environment, almost one-fifth of respondents expressed frustration at the concept. Two UK corporates summed up the feeling.

"Diversification is a nonsense for long-term investors," said one.  "It's a ploy to make money by fund managers and advisers." The other agreed: "[It's always] too little, too late and always clutching at straws - to the financial advantage of your advisors."
As in last year's survey, most respondents said protecting the downside was their main investment priority for the coming year. Unfortunately, the results showed seven out of 17 respondents now convinced that there were no longer any safe havens apart from cash or, as one Swiss fund suggested, "a family".
There was some good news: a few respondents acknowledged that the corporate sector and emerging economies still look healthy in comparison with Western sovereigns - two picked "strong businesses" and "equities" as their safe haven of choice (while conceding that they are not disproportionately allocated that way at the moment). Meanwhile, the only asset class regarded as overvalued by our respondents (71%) was domestic 10-year government bonds.
However, even that was tempered by a lack of conviction about value elsewhere: the best results were for UK and European equities, which nine respondents (43%) thought under-valued.

Read more results in the January issue of IPE.