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Impact Investing

IPE special report May 2018

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Diversification key continental trend

The most pronounced trend in institutional investing on the Continent is towards international diversification, says Greenwich Associates in its findings of its recently published survey of European investment management.
“The trend toward equities was not as strong as we thought it was going to be,” says Linda Nockler of Greenwich, which conducted the survey among 258 continental institutions, with total assets of E1,112bn, of which E579bn (52%) was for 178 pension funds. “But the shift to equities was pronounced in some markets, such as the Netherlands and Germany.”
The anticipated picture in 2001 is that bonds will account for 55% of continental institutional portfolios, compared to 57% currently, with equities just edging up to 30% by then, compared with29%.
The other big swing in continental investing is the move to outsourcing of investment management. “In aggregate, 24% of European institutional assets outsourced and this is expected to increase to 31% in 2001,” she says. The detailed figures show that pension funds currently manage 73% of their assets internally, a considerably lower proportion than for insurance companies which are 86% internally managed. In the next two to three years this ratio is expected to decline significantly for pension funds to 58%, while insurance groups will be relatively unaffected with just 15% outsourced.
“The Netherlands in particularly interesting here as the downward trend is from 80% internally managed to 65%. Obviously in the case of Dutch pension funds, there are a number of large funds, and the swings can be affected by a few of the bigger funds’ indicating movement in the future,” says Nockler. “In Italy, the proportion externally managed soars from 27 to 77%, while other markets generally see a 5–10% shift.”
She points out that the three major trends are not unconnected, as when diversifying internationally into equities, the move would be to use specialist external managers for these.
The survey finds that across Europe over the three years domestic equities holdings by institutions will fall from 15% of assets to 13%, while non-domestic equities will rise from 15% to 17% . On the fixed income side, these swings are much more definite with domestic bonds dropping by 2001 from 45% to to 38%, while non-domestic bonds will climb steeply from 12 to 16% in the period.
Greenwich finds that French domestic bond proportions are set to decline from 66% to 60%, with the share of non-domestic fixed income is expected to double from 5 to 10%. In Germany, the bond story is foreseen to be more dramatic with domestic fixed income average holdings shrinking over the next two to three years to 38% from 47%, while the non-domestic bonds share rises from 10 to15%.
From an equity perspective, the French shed a small proportion of their domestic equity holdings, which decrease from 13 to 11%, with non domestic equities moving from 7 to11%. In Germany, the fall in domestic equities is pretty minimal over the three years, slipping from 13 to 12%, while the non-domestic variety climbs from 9% to 12%.
The Swiss, characteristically, seem magnificently immutable to all the changes swirling about Europe, as Greenwich finds their domestic bond asset proportions drifting down from 36 to 35% by 2001, with domestic equities holding their own 19%, as do non-domestic bonds at 10%, and non-dometic equities creep up to 16% from 14%. Fennell Betson

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