GERMANY - Risk aversion has become much more of a priority for large German institutional investors, according to the latest poll by Union Investment.

It found that 74% said risk aversion was the most important aspect in their investment decisions - up from just 23% last year.

This year only 14% gave achieving their target returns as their top priority compared to 26% the previous year.

However, for pension funds the picture was slightly different, Union Investment noted.

Only 50% of all pension funds surveyed named risk aversion as their most important criterion, while 25% of them continued to prioritise target returns.

For the survey, Union Investment polled a total of 164 major investors in Germany and abroad between June and August 2008, with a total investment volume of around €936bn.

Liquidity was the least important factor in investment decisions (only 9% of German institutions gave it top priority) while in the last study it had been the highest priority for 50%.

Given the altered position towards risk of investors Alexander Schindler, board member at Union Investment, forecasts a shift in asset allocation. He said: "Although the proportion of fixed-income investments declined slightly in favour of alternative investments between 2007 and 2008, the escalation of the crisis suggests that there will be a reversal of this trend in the next few months." (see also earlier IPE-article: Pensionskassen now wary of alternatives)

In a second part of the study Heiner Schierenbeck, professor at Basle University in Switzerland, looked at the widely used value-at-risk model (VaR) which 55% of those surveyed thought fully replicates investment risk.

The standard VaR figure quantifies the estimated maximum loss likely to occur within a fixed period of time at a specified probability. Schierenbeck noted this method did not fully quantify extreme events which do not occur very often but when they do have significant impact on the portfolio.

He showed risk quantification can be improved by taking into account a greater number of events in the more recent past.

Furthermore, including the implied volatility derived from option contracts quoted in the underlying index also delivers improved forecasting ability.

Schierenbeck concluded the application of the above-mentioned factors „could increase excess return in institutional portfolios "by up to one third".