EUROPE – A number of recent institutional investor surveys reveal significant risk aversion among asset owners even as asset managers are beginning to suggest that now is the time to take a little more risk.

As Dutch asset manager ING Investment Management (INGIM) presented its 2013 outlook and the results of a Europe-wide survey of 171 pension professionals in London last week, Valentijn van Nieuwenhuijzen, head of strategy, said: "Investor confidence is low, so many may miss out on the upside risks we believe are clearly visible."

More than half of INGIM's respondents said they had become more sensitive to risk in the past 12 months, with 85% citing a euro-zone collapse as the biggest macroeconomic threat for the next year.

As a result, 57% had increased diversification, 25% had increased holdings in multi-assets, and 13% are holding more cash.

Over the next 12 months, the asset class with the highest proportion of respondents saying they would increase allocation was fixed income (25%), while the asset class with the highest proportion saying they would decrease allocation was equities (26%).

Moreover, a remarkable 40% fear a 'tail-risk event' will occur in the next 12 months, with 60% claiming they have taken steps to mitigate against the impact of such an event.

INGIM cited other risk surveys that are also at very low levels, such as the closely watched State Street Investor Confidence index, noting that the ongoing search for yield is symptomatic of investors being reluctant to take risk while still acknowledging they need to generate return.
"When risk aversion is high, that tells me that if we see even a modest growth recovery we could be seeing a good buying opportunity," said Van Nieuwenhuijzen.

INGIM's own allocation now includes a small overweight in European peripheral sovereign bonds, a neutral position in peripheral investment-grade corporates and an overweight to European and cyclical equities.

Earnings growth will be weak, but the turn in risk appetite will see higher equity valuations in 2013, it predicted.

There is now a strong case for moving from investment-grade credit into equities, suggested Van Nieuwenhuijzen.

"Not all the things are in place to trigger a move by investors, yet," he said. "Perhaps once the fiscal cliff is out of the way they will start to see the opportunity."
While INGIM acknowledged that 'tail risks' are still evident, it feels that the "policy pulse" – particularly central bank policy intentions – have strengthened to the extent that systemic and recession risks are now significantly reduced.

Slightly different findings are revealed in the smaller Pension Fund Asset Allocation Survey of 54 investors in Europe, North America and the Middle East conducted by the consultant bfinance.

These investors see asset price volatility, inflation and the ongoing sovereign debt crisis as the key sources of risk for their funds, and include euro-zone collapse among the top-three surveyed risks.

But bfinance also found "a clear short and longer-term intention" to move to emerging market equities and debt largely at the expense of sovereign bond markets in the first half of 2013, and at the expense of developed market equities over the next three years.

Meanwhile, a third survey of 255 institutional investors by alternative investment manager Aquila Capital finds more than half sceptical that the euro will exist in its current form by 2015.

These doubts are defined markedly by location, with just 8% of UK investors believing the euro will exist in its current form as opposed to 72% percent in Italy, 60% in France and 40% in Germany.

Almost two-thirds of Aquila's sample expect positive returns from equities over the next five years, whereas almost half expect negative returns from sovereign bonds.

Investors have most confidence in Scandinavian and German government bonds, while a majority indicated they would not invest in euro-zone peripheral government bonds.