GLOBAL - Financial risks loom large in the perceptions of European institutional investors, according to Allianz Global Investors' (AllianzGI) first RiskMonitor survey.

The survey found that investors rank interest rate risk first when asked about their biggest risk in the next 12 months, with 70% of respondents classing interest rates as a 'huge' or 'considerable' risk to their ability to achieve their investment targets.

It also found that tail risks are a concern for almost 50% of investors, reflecting a major shift in investor attitude to risk compared with perceptions before the financial crisis.

AllianzGI said this called for a new framework for risk management.

Speaking at the survey's launch, Reinhold Hafner, chief executive at AllianzGI subsidiary risklab, said: "We have to shift from a backward-looking static framework based on normal distribution to a forward-looking dynamic risk management framework that explicitly accounts for empirical facts such as fat tails and correlation breakdowns.

"Active and dynamic risk management strategies that go beyond pure diversification will become evermore important."

Overall market volatility and a sharp drop in equity prices were also seen as major risks, with more than 72% and 64% of respondents, respectively, perceiving market volatility and falling equity markets as a huge or considerable risk.

More than 61% of survey participants considered sovereign debt risk as significant, but their faith in the euro as a currency remained undeterred, with 76% believing that the euro would survive under the current conditions.

Financial risks far outweighed non-financial risks. Stricter regulation or rising reporting requirements ranked highest among the non-financial risks, but even then they were only seen as a major risk by 29% and 20% of respondents, respectively.

Environmental, social and governance criteria may be a priority for many pension funds, but rank low in investors' perception of risk.

However, Elizabeth Corley, chief executive at AllianzGI Europe, said: "Attitudes to risk are volatile and shift. The question now is whether this is a delayed reaction to the crisis or a sustained new shift in risk perception."
A total of 156 institutional investors - predominantly pension funds - took part in the survey, which was carried out by IPE on behalf of Allianz GI in 11 European countries between 14 March and 8 April.