Frank Schnattinger outlines the results of IPE Institutional Investment’s 2011 survey of the German institutional market

Germany’s institutional investment market, one of the largest in Europe, remains quite opaque. Details about investors and their investment intentions are difficult to come by. Information is also scarce within the industry and investors often lack a reference point.
Against this background, at the beginning of this year, IPE Institutional Investment conducted its fifth comprehensive survey of German institutional investors with the intention of gathering more information about their current requirements, thoughts and opinions.

160 institutional investors, with a total asset volume of €620bn, took part in the survey, which closed in February. In all, 75% of the investors accounted for more than €500m. Pensionskassen and other types of pension funds took part, along with banks, insurance companies and corporate treasury departments. Of the respondents, 61% were heads of investment, treasury or finance, and 19% were CEOs or managing directors.

Widespread contentment with 2010
Despite the backdrop of low interest rates, expectations were at least partially, if not fully, met for the clear majority in 2010. One apparent contradiction which appears in the returns cited in the survey, considering German institutional portfolios are still strongly weighted towards fixed income, is the positive corresponding effect of diversification.

In many cases, corporates said they had considerably increased their equity allocation over the year, while Pensionskassen and insurers allocated further assets into real estate. It is also clear that institutional investors are once again looking closely at alternatives - a trend that almost stopped during the crisis. Investors named infrastructure and commodities as interesting diversification options that were promising sources of return.

With regard to investment vehicles, aggregated across all asset classes, Spezialfonds retain pole position, followed by direct investments. Mutual funds and exchange-traded funds have clearly improved on their position in comparison with previous years.

Bond market losses predicted
Re-allocation is urgently called for as a large majority of investors see an end to more than three decades of positive returns in fixed income. There is still a feeling of apparent security in European government bonds; despite events in Greece, Ireland and Portugal, only a small minority expects a haircut in the euro-zone.

The risk of inflation was identified as potentially dangerous. Though not the case this year, more than 25% of respondents foresaw an inflation rate of more than 5% in the euro-zone. No wonder investors are focused on assets with returns that are to some extent inflation proofed, such as real estate or infrastructure.

This shift of emphasis to alternatives illustrates well today’s thinking on investing. When asked about current trends and investment ideas, institutional investors said they had already implemented a variety of alternative strategies, or were considering them.

Responsible investors
Another clear trend in the German market is socially responsible investing (SRI). Around 25% of the respondents said they were currently considering the issue. Further investigation shows that equities and corporate bonds are considered the most appropriate asset classes for the implementation of an SRI strategy, private equity or commodities less so. One interesting observation was that 61% of the investors believed asset managers had an obligation to offer or to apply sustainable strategies. Industrials were only named by 28% of investors in this regard and investment banks by 27%.

ETFs under the microscope
ETFs are a mature investment vehicle for institutional investors after many years of strong growth, so the study asked investors for their perceptions of various providers. The study reveals that the ‘prize’ for the most well-known ETF goes to Deutsche Bank’s dbx trackers, which also led in various categories in the survey.

Asset manager satisfaction
As in previous years, survey participants were given the opportunity to articulate praise or dissatisfaction with service providers in areas such as performance and service. In this regard there was clearly greater satisfaction with providers - possibly thanks to the time that has elapsed since the crisis.

Helaba Invest, Allianz Global Investors and DB Advisors came out well, but a total of 70 companies received positive comments - a record in this survey. Criticism was correspondingly lower, and only a dozen providers received negative comments. Hopefully a good sign for the German market for 2011.

Frank Schnattinger is editor-in-chief of IPE Institutional Investment in Germany. To receive the complete results of the study please contact Frank Schnattinger, f.schnattinger@institutional-investment.de or visit www.institutional-investment.de/store. The study is available in English and German