GERMANY - German pension funds' appetite for fixed income exposure will push them towards investing in emerging market debt, according to HSBC.
"Given the funds' risk budget, the bond share in portfolios will remain high, so in search for return we observe that pension funds will diversify into emerging market debt," Bernd Franke, chairman of the board at HSBC Global Asset Management Germany, a subsidiary of HSBC Trinkaus & Burkhardt, told IPE.
"Many would probably rather invest in debt securities issued by the regional government of Northrhine-Westphalia, but that would not yield enough return," Franke added.
"Emerging market debt has lost its obscurity for German institutional investors and they are also strongly looking into local currency investments," said Heiner Weber, member of the management board of HSBC GAM.
Franke believes that while emerging market equities will remain only a small part in most institutional portfolios, emerging market debt "will become part of the strategic asset allocation".
HSBC cites various reasons for the development, including the growing presence of emerging markets in the media and the increased availability of products offering access.
Furthermore, these regions "are too interesting not to take a look" as they offer growth opportunities and had a very low correlation during the crisis, Weber said.
The broadening of asset classes in the strategic asset allocation is the continuation of a long-term trend, but Franke does not see a major shift in investor behaviour caused by the crisis.
"Like after many crises, investors currently distrust active management and sometimes take traditional bond or equity mandates in-house. But they are happy to outsource specialist mandates including EM debt," says Weber.
"For these new exposures pension funds are also using consultants, but I do not see that this will lead to a longer trend of German institutional investors increasing their use of consultants," added Franke.
HSBC sees many investment decisions currently made being based on a lack of risk budget which forces some investors to follow market cycles.
"While overlay management helps you in a crisis it does not tell you when to get back into a market so the question of tactical allocation decisions becomes more important," Franke points out.
Institutional investors have sought to outsource some of this tactical decision making by adopting multi-asset mandates and/or absolute return strategies, he said.
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