Asset allocation in Spain is set to change as a result of the both the euro and also because of the changing domestic pension and investment scene. Spanish funds have fewinvestment restrictions: simply that 90% must be invested on recognised stock markets, 1% in cash and the other 9% is free of any restrictions.
Current asset allocations are heavily dominated by domestic assets, particularly bonds. Foreign assets make up as little as 3% of portfolios, with total equity allocation of about 10%. Increasingly funds are looking towards a more equity based investment strategy. This is partly driven by increasing investor education, particularly in the individual pension market where some plans offer more than 80% in equities. More importantly the fall in bond yields has lead managers to look elsewhere for higher returns.
A major barrier is that all members of a qualified plan must share the returns of the same fund in, essentially, a defined contribution scheme. This has led to a view that a high bond content has to be maintained in order to reduce the risks for the older members of the scheme who are close to retirement. The younger members suffer as they are unable to invest as much in equities as they may like.
Historically, investment has been conservative favouring the older group, however, the trend is towards an uneasy compromise which satisfies neither group.
Following the euro introduction there will be an increase in the number and depth of the equity sectors available to Spanish managers. Slowly investors and managers are realising that all Euroland investments are available, although they remain wary on non-euro investment due to its currency risk. The pace of change is slow reflecting cautiousness and the narrow skill set of most Spanish fund managers. The larger, multinational investment managers will be best placed to take advantage of these changes. Many of the smaller managers may be forced to outsource part of their management.
Overall, the percentages of both equities and foreign investments will increase considerably in Spain over the next five years albeit slowly at first. Coupled with the large increase in pension fund assets, there will be significant changes within the leading managers and their emphasis on both euro-wide and equity investment.
Ian Hinton is with Aserplan