European institutional investors continue to be risk averse in the wake of the financial crisis.
Like their US counterparts many European companies are being circumspect when it comes to portfolio risk. According to consultancy Greenwich Associates, equity allocations among European institutional investors that were pared back during the crisis are not being rebuilt, while allocations to more staid fixed income assets are increasing.
Greenwich said it polled 381 of the largest institutions in Continental Europe and also learned that their primary concerns for the rest of 2010 were risk management, asset protection, complying with new regulations, and monitoring a burgeoning government debt crisis. As part of the effort to mitigate these concerns, they are staying away from equities and stressing their doubts about their investment managers’ abilities to “deliver value through active management,” Greenwich said.
“Institutions are aware of the need to achieve higher levels of returns in order to fund long-term liabilities or otherwise meet their obligations,” said Greenwich Associates consultant Tobias Miarka. “However, in light of the regulatory framework many have to comply with and a further decreased risk appetite and they do not see a better alternative to their current conservative, fixed income-oriented allocations.”
This is similar to what The NeuGroup peer group members have revealed in recent meetings. At The NeuGroup Treasury Investment Managers’ Peer Group meeting in the spring, a director from the meeting sponsor bank argued that low-rate environments are the time to dial down the risk. And that based on the efficient frontier model, a low-rate environment increases the likelihood of negative returns and requires the portfolio to step outside of the “admissible region” of investment options to compensate.
In the Greenwich research, equity allocations within European institutional portfolios increased by only about 1.5 percentage points, growing from 17.8 percent of total assets in 2009 to 19.4 percent in 2010. Allocations to European equities actually decreased to 11.3 percent in 2010 from 12.1 percent in 2009, while international equity allocations increased to 8.1 percent from 5.7 percent. Over the same period, allocations to European bonds increased to approximately 57 percent of total assets from 52 percent. Overall, assets under management (AUM) by institutions in Continental Europe increased 18 percent from 2009 to 2010.