In 2001, continental European funds continued both to outsource the management of their assets and shift their asset allocation strategy. These are key findings of our study of investment management in continental Europe conducted in the summer of 2001.
For three years, we have charted the shift in asset mix by continental European institutional investors from domestic shares to non-domestic shares both within Europe and abroad, a pattern which this current study shows continuing. As can be seen in figure 1, the proportion of fund officials planning to downsize their domestic equity portfolio in the next three years pretty well matches those who expect to increase their non-domestic European equities within the next three years.
Supporting the same themes, the number of fund officials expecting their investment in non-domestic European shares to rise in the next three years also outpaced those funds expecting a decline. The clear trend to further increase non-domestic European equities might seem somewhat surprising, since many institutions in Germany, France, and other European markets have already replaced domestic portfolios with European portfolios during the last few years. However, despite this shift, domestic equities are still often overweighted in these markets. The US and other international equities also maintain robust interest.
With the lure of non-domestic markets still strong, the drive for international diversification remains the key trend of the continental European marketplace, according to our research.
As funds diversify aggressively across Europe and internationally, they continue to outsource the management of assets. Externally managed assets accounted for 39% of all institutional assets in 2000, up from 24% the year before. (See figure 2)
Some of this is attributable to the fact that fund executives rely more than before on the expertise of external managers for identifying the best opportunities in equities and in international investments.
Externally-managed assets are expected to grow substantially in the years to follow, fund officials tell us, increasing by a total of 24% from 2000 to 2003 and representing a total asset pool of E661bn, up from E531bn in 2000.
Across Europe, the average number of managers used increased from 6.9 in 2000 to 7.6 in 2001. This significant increase further reflects how diversification is becoming the key trend.
In tracking developments across continental markets we conducted detailed research in four major European ones: France, Germany, the Netherlands and Switzerland. Together, these four countries account for more than three-quarters of all externally managed assets tracked by us on the continent. Separately, they offer some points of similarity and contrast worth examination.
In France, the percentage of French fund assets managed externally is nearly 40% of total assets, and French funds have continued using more external managers as they diversify into more European and international products.
Over one-quarter, 29%, of large French institutions expect to hire an investment manager in the next 12 months. In particular, French institutions plan to hire significant number of external asset managers for European and US equities.
In contrast to some other European markets, hiring activity among French institutions for active domestic equities was fairly robust in 2001. Despite notable interest in alternative asset categories, there is little demand yet for hiring managers for hedge funds and private equity.
In the Netherlands, the percentage of fund assets managed externally in the Dutch market was 50% in 2001, according to our research, but there is no expected increase in that percentage and only a modest number of funds expect to hire additional managers in 2002.
The modest hiring expectations reflect the fact that Dutch institutions have already made significant moves toward outsourcing of assets and diversification to pan-European and international investments in the past few years.
While most Dutch investors do not expect major shifts in their investments, there has been some hiring activity in the past year in the field of international bonds. In particular, 8% of Dutch funds hired a manager for European credit bonds last year.
In Switzerland, the largest Swiss investors outsource 30% of their assets and do not expect externally managed assets to grow by 2003. Among the largest Swiss institutions, hiring activity continues to be robust, as 39% of funds hired a manager last year, and 34% of funds expect to hire an outside manager this year. As with other European markets, Swiss institutions are diversifying into European, other international, and alternative investments.
Reviewing hiring expectations for the coming year, Swiss funds plan to hire managers for European equities (8%), private equity (8%), and hedge funds (10%).
In Germany, externally managed assets represent 30% of total assets of large German funds. Not much future outsourcing is expected, as these externally-controlled Spezialfond investments are expected to represent 33% of total fund assets by 2003. While outside manager hiring activity is expected to decline as 33% of funds expect to hire a manager in the coming year, down from 49% last year.
German sponsors use more managers than in other countries, providing more opportunity for ‘replacement’ demand when existing managers fail. German fund officials reported strong actual hiring for international bond managers (at 18%) and European credit bond managers (at 12%) during 2000. Going forward, only 4% of German fund officials plan to hire a manager for international bonds and European credit bonds, and 6% plan to hire a manager for high-yield bonds.
Berndt Perl specialises in the investment management market in continental Europe for Greenwich Associates in Connecticut
In April and May, 2001, Greenwich Associates conducted interviews with over 450 professionals at corporate, public and industry pension funds, insurance companies, foundations, corporate treasury funds, and other large institutions. These institutions were based in Germany, the Netherlands, Spain, France, Italy, Switzerland, Sweden, Finland, Denmark, Norway, Belgium, Portugal and Austria.