The average equity allocation in the portfolios of respondents to this month’s Off The Record survey is around 36.7%, down from just over 40% 10 years ago. These averages hide broad variety. The biggest de-risker went from 70% equities to just 8%, and nine actually increased their allocations.

Eight respondents plan to increase equity allocations and eight plan to decrease over the next five years. A Swedish fund warned: “All investments in long bonds for hedging of liabilities will cost returns.” But a UK fund among those looking to move capital away from equities said: “Valuations will likely get too extended and warrant a reduction.”

Twenty-one expect to keep their equities allocation roughly the same. “Valuation in many equity markets has increased,” one Dutch fund commented. “[However], the hesitance of the Fed to taper suggests a continuation of the current investment environment for the medium term.”

A Danish fund added: “Equity holdings are restrained by the risk budget, which will probably be tightened by […] Solvency II rules.”

Asked if they were trying to find ways to use their equity risk budget more efficiently, 14 said that this was not the way they thought about the problem. However, 22 respondents indicated that they were deploying a range of risk-efficiency strategies: 11 use low-volatility equity strategies, while nine replace some equities with high-yield bonds, three with convertible bonds and eight use tail-risk hedges.

We asked which distinct categories funds recognise when they build their equity allocations. Most explicitly split the world into global and emerging markets (21 and 28, respectively, out of 37 respondents used these categories). A smaller number used developed markets, domestic markets and individual regional categories (17, 11 and 16, respectively). Only a handful had specific allocations to individual countries, frontier markets or styles and sectors.

Nine respondents out of 32 doubted that the way their fund organises its equity portion is well suited to capturing regional and sectoral value opportunities. “We are revisiting how we manage equities,” said one UK fund.

A number that think it is well-suited to capture these opportunities said that they rely on their active managers for this. “We believe splitting high level into DM and EM is appropriate (in order to structurally overweight EM),” as one German fund put it. “Sector and regional allocations are more effectively done by managers.”

On average, respondents think that North America is the most expensive region and Europe the least. “Having said that, we are

not exploiting the current valuation differences, as we do not believe they are at extremes,” stated a Swiss fund. And a Dutch fund warned: “US is ahead in price, Europe is lagging in price, Japan is, in the long run, too risky – too high-priced for the risk.”

Asked to comment on the valuation metrics that are most useful and relevant to them, six of the 22 cited Robert Shiller’s CAPE ratio, and nine the more basic short-term P/E ratio. However, two cited the comparison of dividend and bond yields. One said that dividend yield was “the only metric that is difficult for management to massage”, two others cited the price-to-free-cash-flow ratio – and a Dutch fund recommended simple “common sense”. A compatriot seemed to sum up the general view by adding: “It’s important to use several metrics to create an integral view, but also to use them consistently.”