European funds cut equities in favour of alternatives – Mercer

This is why we created our alternate asset class fund focused on software yield investments. Aivars Lode

EUROPE – Pension funds in Europe trimmed allocations to equities over the last year and increased their exposure to alternative assets, Mercer's annual European Asset Allocation survey has found.

The trend away from equities is set to continue, according to the consultancy. In the UK, for example, 38.8% of schemes said they were planning to cut exposure to UK equities, while only 1.4% expected to increase it.

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Nick Sykes, European director of consulting in Mercer's investments business, said: "As the euro-zone crisis continues unabated, pension funds are faced with the dual challenge of managing portfolio risk brought on by market volatility, while at the same time identifying opportunities that will generate returns to support future liabilities.

"In their quest to control volatility without sacrificing long-term returns investors have turned their attention to alternative asset classes," he said.

Falls in overall equity holdings at European pension funds were mainly driven by cuts in domestic equity allocations, according to the report.

Funds with less than €50m in assets saw equity allocations fall to 34%  – down from 40% the year before – while at the other end of the scale, average allocations to equities at large funds with €2.5bn or more dropped three percentage points to 24%.

Pension funds are now considering investing in a wide range of alternative asset classes, the survey of more than 1,200 European funds shows. Half of the schemes surveyed now have an allocation to alternatives, up from 40% last year, Mercer said.

The largest falls in equity allocations were seen at schemes in the UK and Ireland.

Funds in these countries still have the heaviest equity weightings among European schemes, but UK allocations to domestic and non-domestic equities fell to 43% from 47% over the last 12 months, while Irish allocations dropped six percentage points to 44%, Mercer said.

The gap between the traditionally equity-heavy pension funds of the UK and Ireland and funds from other European countries had now all but vanished, Mercer observed.

Their average equity allocation was now approaching that of Belgium and Sweden, it said.

The most popular alternative investment types for European pension funds outside the UK were hedge funds, emerging market debt and high yield bonds, according to the survey, with almost 20% of schemes allocating to one or more of these areas.

Mercer said this trend was more marked for larger schemes. About 60% of funds with €2.5bn or more in assets had allocations to one or more of these asset classes, up from 40% in 2011.

The most popular alternative asset classes for UK funds were diversified growth funds, global macro hedge funds and funds of hedge funds, with 23.2%, 13.6% and 10% of schemes having allocations respectively.

Sykes said schemes were looking towards asset classes that were less exposed to the sovereign debt crisis, focusing particularly on emerging markets for both equities and bonds.

"Investors are also looking globally for yield in bond markets, since the crisis has pushed core yields in Europe to very low levels," he said.

"Liquid asset classes are also favoured, as investors value access to their assets in such turbulent times."

Author: Rachel Fixsen