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October 13, 2006
European institutions diversify portfolios with alternative investments
According to new research from Greenwich Associates, the proportion of Continental institutions naming themselves as hedge fund investors increased from 26% in 2005 to 35% in 2006, and another 10% say they have plans to begin investing in hedge funds in coming months.
'Our research suggests that a large proportion of Continental pension funds, banks, insurance companies, and other institutional investors are taking significant steps away from the somewhat tradition-bound investment practices that characterized the industry for the previous 50 years,' says Greenwich Associates consultant Markus Ohlig.
As they do so, they are increasing their exposure to alternative asset classes and non-European equities, and they also taking more fundamental steps like increasing the proportion of their assets doled out to external managers. Greenwich Associates' 2006 Continental European Investment Management Research Study analyzes the strategic shifts undertaken by Continental institutions and presents the latest research findings on such critical topics as growth in assets under management; changes to asset allocation, and increases in compensation levels for Continental investment professionals.
Poised for Growth: Non-European Equities, Emerging Markets and Alternatives
Institutional assets in Continental Europe increased some 7% last year, driven by the strong performance of equity markets in 2005. However, fixed income and money market accounted for two-thirds of institutional asset allocations at the start of 2005, limiting the impact of strong equity market performance on the overall portfolios.
Strong performance of equity markets relative to fixed income was the main driver in an increase of equity allocations from 23% to 26% of total assets, whereas there is little evidence suggesting a substantial reallocation of assets from fixed income to equities.
However, Greenwich Associates research suggests that institutions are prepared to increase allocations to non-European equities. Nearly a third of European institutions say they expect to increase their allocations to Japanese equities over the next three years - a proportion six times higher than those saying they expect Japanese equity allocations to fall. Another 42% of institutions say they expect to increase their allocations to emerging market equities between now and 2009.
Continental institutions express similar enthusiasm for alternative asset classes, but to date actual allocations to alternatives have failed to keep pace. Allocations to private equity and hedge funds remained at 2% of total assets from 2004 to 2005, while real estate allocations declined marginally from 6% to 5%.
'Although allocations haven't budged, European institutions remain bullish on alternatives - at least in theory,' says Greenwich Associates consultant Tobias Miarka. 'In private equity and hedge funds, 41% of Continental Europe's institutions expect their allocations to increase by 2009, while only 1% expect them to decline. At present, the average institutional investor using hedge funds has EUR 200 million invested in the asset class, distributed among three or four managers or - more frequently - fund of hedge fund managers.'
External Expansion
The diversification of institutional investment portfolios into new regions and strategies is contributing to a hiring boom for external investment managers on the Continent. More than a third of institutional assets in continental Europe are managed by external investment management firms. The typical Continental institution increased the number of asset managers it employs to nearly 11 in 2006 from less than 10 in 2005. 'Across the Continent, almost half of all institutions hired a new external manager over the past year,' says Tobias Miarka.
This robust hiring activity took place over a 12-month period in which institutions increased the share of their total assets under management by external firms to 34% from 31%. 'Although that increase might seem negligible in percentage terms, it actually represents a shift of some EUR 75 billion,' says Chris McNickle.
-hedgeWeek.com-
Posted by su at October 13, 2006 5:12 PM