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German institutional investors have faith in emerging markets

German institutional investors are turning to emerging markets and backing third-party asset managers to increase their exposures, according to ratings agency Scope.

Groups such as HSBC Global Asset Management (HSBC GAM), JP Morgan Asset Management (JPMAM), GAM and Lazard were named by Scope among the most popular managers as investors sought to diversify into emerging markets.

The group surveyed 106 German institutions managing €535bn, 23 of which were pension fund providers. It found that 41% of investors thought the outlook for emerging market investment grade debt was “very good or good” over the next three years.

In high-yield bonds in emerging markets, more than 28% had a positive outlook. This compared to just 10.5% of investors with a positive outlook for US debt, and 5.2% with a positive outlook for European fixed income.

Fixed income remained the dominant asset class in the portfolios of the surveyed institutions. While most investors manage such assets in house, Scope reported that outsourcing had increased as investors had diversified.

“Investors are increasingly shifting towards other segments – not just emerging markets but markets such as convertibles too,” the ratings agency said in its analysis. “The expertise required to operate in these sectors is usually provided by external managers.”

Scope also asked which asset managers investors would trust most with emerging market fixed-income and the ranking showed

GAM, Lazard and HSBC GAM were ranked by investors as the most popular emerging market fixed income managers. For corporate bonds investors rated Fisch Asset Management, Union Investment and JPMAM.

Currently only 3% of the investors’ fixed income exposure was in high yield bonds, Scope reported. This is unlikely to change as regulatory frameworks for insurers and banks in Germany are generally risk averse, requiring a high exposure to high-quality fixed income assets.

Trends in equities and alts

Scope also reported that three-quarters of investors had a positive outlook for emerging market equities.

Faith in European equities was almost as strong, with 71% having a positive outlook. US equities and Japanese stock markets were viewed more cautiously.

JPMAM, UBS Global Asset Management and HSBC GAM were highly rated by investors for their emerging market equity offerings. For European stocks investors preferred Union, Deka and Deutsche Asset & Wealth Management.

Pension funds were the leading allocators to equities, Scope reported, with an overall exposure to the asset class of 14%. By comparison, insurers allocated 3% and banks even less.

Scope also said there were “significant differences between investor groups” when it came to asset allocation in alternatives or real estate.

Pension funds led the pack on allocating to alternative asset classes with a 6% exposure, while other institutions held less than 3%.

In real estate, pension funds increased their exposure to 11% while banks still stood at 5%, Scope said.

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