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Impact Investing

IPE special report May 2018

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Dramatic growth for global equities

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Emerging markets high on funds’ agenda, Watson Wyatt survey finds
The appetite of European pension funds for global equities is set to grow dramatically over the next three years, according to new research carried out by international consultants Watson Wyatt.
European pension fund respondents allocate some e8.8bn (8% of total outsourced assets) to global equity mandates, including domestic equities, but almost half of those who responded to the survey (47%) indicated that they would increase their allocation to this asset class in future.
The survey illustrates the growing acceptance of equity investing amongst European institutional investors and, in particular, their willingness to invest in foreign equities.
For example, allocations to emerging markets are also set to grow significantly. Just over e8bn is allocated to this area, but 39% of respondents that already invest in emerging markets indicated that they intend pushing up their allocation still higher.
Unlike UK pension funds, which have studiously avoided this market over the past few years, the most popular outsourced asset class amongst European respondents was US equities. European pension fund respondents allocated some e18.2bn to US equities (17% of total outsourced assets) and 26% stated that they intend to increase their asset allocation over the next three years.
The survey also highlighted the increasing propensity amongst European institutional investors to outsource their investment management arrangements to external specialists.
In total 196 corporate and public pension funds in nine countries across Europe were contacted. Of these, 154 had fully funded pension arrangements and120 of these had decided to outsource some or all of their investment arrangements to external managers (37% of total respondent assets). In fact, funds in Switzerland, the Netherlands and Germany came top of the list in terms of using third party organisations, awarding 260, 222 and 131 external mandates, respectively.
In terms of European pension fund respondents total allocation to external mandates, almost 50% went into foreign equities, followed by pan-European equities (12%), Euro equities (10%) and balanced (8%). The largest average mandate size was for foreign equities at e409m.
Unsurprisingly, the largest specialist mandates were outsourced from the Netherlands and Switzerland.
Having made the decision to appoint an external manager, most European pension funds (55%) opt for an active manager, no doubt prompted by the widespread belief in Europe that active management can add value. Passive management, meanwhile, was used by a mere 13% of pension funds, while a far greater amount (31%) plumped for a combination of active and passive approaches. Nevertheless, there are countries where the trend towards passive management has clearly accelerated, most notably in Belgium, Denmark, Ireland, Sweden and Switzerland. The Dutch prefer a bipartite approach involving active and passive management.
When it comes to selecting investment managers, the quality that most European pension funds look for is a clear and lucid investment philosophy. Mandate suitability and investment performance come next on their list of ‘must haves’. Bottom of the list were fees and culture, respectively, which will please any low profile manager trying to market an expensive equity product in continental Europe.

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