The eighth European institutional asset management survey reveals that real estate is the alternative of choice and that equities are increasingly popular. Fennell Betson and Tony Pryce outline the key findings
The European Institutional Asset Management survey is in its eighth year, which almost makes it venerable in survey terms. This survey, which has been supported by Invesco throughout this period, has provided an invaluable insight into the behaviour of Europe's institutions, which were a much less observed species eight years ago than they are now.
Despite EIAMS' age, it is in robust health, but since IPE became involved this year in organising the collection of the data from investors, it has had something of a transfusion in terms of the type of institution responding. There has been an increase in the numbers responding by 28% to 115 and the majority of these come from pension funds, but other respondents include insurance companies. foundations
The net has been cast wider in terms of countries, with Britain and Ireland, Nordic countries and ‘new Europe' as well covered this time around. The assets managed by respondents came to €314bn and the institutions varied in size from the large (over €5bn) to the small (under €1bn), but the focus of EIAMS is helping redress the balance by covering the small and medium sized institutions.
So what are the key findings?
Asset allocation: While country differences are very apparent, changes are happening over time, with funds overall now allocating one third of their assets to equities and one half to bonds. In the previous survey (2006), there was over twice as much investment in bonds than equity. While equity investment is unchanged in France, Benelux and Italy, it has doubled in Germany and still Britain and Ireland have the highest allocations.
Alternatives: Real estate is the alternative with pride of place across Europe's institutional portfolios. This allocation continues to grow and is now responsible for 5% assets. The move to hedge funds appears to have stalled, but private equity is showing growth, although without much evidence of a breakthrough. Commodities are definitely gaining acceptance, but the allocations are still modest.
External managers: German institutions, joined now by ‘new Europe', delegate least to external managers, but over two thirds of all portfolios are externally managed. Compared with the previous EIAMS, when smaller players indicated greater usage of outsourcing than larger ones, currently there is a closer pattern between all sizes of institution, though larger investors manage most in-house.
The numbers of segregated mandates in use has fallen, but there has been dramatic increases in the use of investment funds, the survey finds.
Duration: For the first time, EIAMS asked about average duration of investors' liabilities and of their fixed income portfolios. Not surprising is that there is wide variations between markets. The size of the gap in terms of difference in years is: Italy 3.5; Benelux 5.9 years; Germany 5.1; CEE 5.8; France 6.1; GB & Ireland 6.3;; Switzerland 7.5 and Nordics 17.0.
Consultants: The use of consultants is now growing strongly, according to the findings, from about one third of investors using them in the past four surveys to one half in the current EIAMS. As before, asset allocation is the prime reason for their use, but now they are more actively sought for both manager selection and investment advice.
Fundamental indexing: Just a quarter of respondents said they were using this index strategy, with 70% saying no and just 11% considering using it. The concept was explained as an index using such factors as level of sales, cash flow, dividends and book value rather than market capitalisation.
Swap usage: Only 30 of the 115 respondents use interest or inflation rate swaps, but over 80% of those use them for managing liabilities or guarantees. Among the ‘other' uses are hedge interest rate risk, economic volatility, part of hedging and currency management.
Exchange traded funds: Growth of ETF usage has trebled from 13% in 2006 to 44% in this survey. Now one-half of larger investors are using ETFs. The survey also shows how futures are being challenged by ETFs as the way to gain index exposure. The countries with high usage of futures are the Germany and the Nordics, but they are significant users of ETFs as well.
Responsible investing: Socially responsible investment and corporate governance strategies are currently in place with two fifths of respondents, which is a big increase on the previous findings. The main reason given by SRI/ESG adherents is that it reflects the beliefs of owners and boards. Written policies in this area were most popular amongst British and Irish institutions.
The full European Institutional Asset Management Survey 2008 will be available on IPE.com's White Paper channel shortly.