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German institutionals flee to fixed income safety despite sovereign crisis

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  • German institutionals flee to fixed income safety despite sovereign crisis

GERMANY - Institutional investors in Germany have reduced exposure to nearly all asset classes in favour of fixed income over the past year, according to a survey by Union Investment.

The survey's author also warned that current investment regulation, while well-intentioned, risked creating the very crisis it sought to avoid by limiting a manager's investment choice.

The shift, a 12 percentage point increase in fixed income, affected equity and money market investments particularly hard - both declining 4 percentage points over Union's previous annual Risk Management survey.

The remaining shift in allocation was drawn from unnamed "other" investments.

However, investment in real estate rallied and rose by a fifth to 5%, recovering from 2010's survey-long low among the 42 institutions that, on average, reported assets under management of €7bn.

Speaking at the asset manager's risk management conference in Mayence, survey co-author Lutz Johanning of the Otto Beisheim School of Management said the increased exposure to fixed income was "astonishing" in light of recent sovereign debt fears in the euro-zone.

He also noted that the survey was conducted in July and August and therefore did not fully encompass current market trends.

However, its results nonetheless found that 90% of respondents ranked runaway government debt as a likely risk, and that they believe this debt has a significant impact on the global market.

Union's survey also saw increased risk aversion, with a total of 83% of respondents either 'absolutely' risk averse or 'fairly' risk averse - a 6 percentage point increase over the past year.

Compared with previous surveys, no one said they would take a speculative market approach, while those who tended toward speculation fell to 2% from 5%.

Johanning said: "As you can see, the risk aversion is reflected in the asset allocation, especially in the high exposure to fixed income - dominant with a 74% share of portfolios."

He also noted that there was no industry-wide consensus on how to best manage global risk, with a fifth opting for regular monitoring. Others said they avoided certain regions, and 14% said high-risk investments were excluded.

A further 12% said diversification was an approach employed, while 14% claimed to not manage global risk at all.

Regarding investment risk, 21% of investors said they considered risk analyses conducted, while 11% specifically cited environmental, social and governance concerns when selecting assets.

Discussing the impact of new financial regulatory frameworks put in place since the crisis, Johanning struck a cautious note.

He said that while uniform regulation was well-intentioned, it could lead to problems - likening it to the collapse of a bridge triggered by an army marching in step.

He said: "The regulation, as well-intentioned as it may be, is already leading to such vibrations throughout the capital market."

He also warned that too similar an investment approach taken by all could provoke the crash the regulation seeks to avoid.

"Guarantee structures are no doubt very sensible concepts, but the mirroring approach [of portfolios' structure caused by regulation] are most certainly not," Johanning said.

"We must address this issue, and we must address it to government, because it can otherwise have self-fulfilling effects, and, at the end of the day, we will create a crisis through our actions."

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