Mercer is proud to present our 2013 European Asset Allocation Survey.
This year our survey covered over 1,200 plans from 13 countries, with total assets of more than €750 billion.
In this year’s survey, the long observed downward trend in equity allocations continues, as plans look to reduce equity-related volatility. The proportion of plans across Europe that allocate some part of their assets to a liability hedging (or LDI) mandate increased from 15% to 26% over the past year. In addition, the range of alternative asset classes to which European pension plans allocate a portion of their assets continues to grow each year, with around half of the plans surveyed now having an allocation to alternatives.
“Against a backdrop of ultra-loose monetary policy, negative real interest rates and a range of unsolved economic issues, pension plans are faced with the challenge of generating positive real returns while reducing funding level volatility. In response, investors are expanding their investment tool-kit, making their strategy more dynamic, and introducing scenario and stress test analysis into the risk management process”.
PAT RACE, UK HEAD OF MERCER INVESTMENTS
EQUITY ALLOCATIONS CONTINUE TO FALL
There remain powerful incentives for pension plans to reduce equity-related volatility, in particular the regulatory environment and a desire on the part of corporate sponsors to mitigate the impact of pension plan volatility on their balance sheets. In addition, rising equity markets over the course of 2012 and early 2013 will have generally lifted funding levels, providing some of those plans on a path to a lower risk position with an opportunity to reduce equity allocations.
EVOLUTION OF BOND PORTFOLIOS
Although pension plans have, in general, been loath to add meaningfully to traditional government and corporate bond allocations very recently, given the low yields on offer, investors have continued to allocate to a range of assets that can help match their long-term liabilities. Sophisticated liability-driven investment (“LDI”) strategies are now commonplace among plans in the UK and the Netherlands and, to a lesser extent, in Germany and Ireland.
INCREASING BREADTH IN ALTERNATIVE ASSETS
Pension plans across Europe now allocate to a vast array of alternative asset classes in order to access an increasingly diverse range of return drivers. In particular, plans have been expanding the range of asset classes within their fixed income portfolios to include high yield, emerging markets debt, private debt, and less constrained bond mandates. Investors are also increasingly comfortable allocating to niche hedge fund strategies, and real asset portfolios now include exposure to long-dated property leases, infrastructure, timber, agriculture assets, and natural resources.
GREATER USE OF DELEGATION TO MEET THE GOVERNANCE CHALLENGE
Delegated decision-making now plays an important role in many aspects of a pension plan’s investment strategy. Within the alternatives portfolio, diversified growth funds (“DGFs”) have become a popular means of introducing diversification and dynamism for small and medium-sized plans with a limited governance budget. LDI strategies increasingly incorporate a degree of delegation, whether in relation to instrument selection (e.g. swaps versus government bonds) or for the implementation of interest rate and inflation hedging when given yield triggers are breached. And at a strategic level, many plans now delegate the implementation of changes to the growth/defensive asset allocation (often in response to funding level changes) to a subcommittee, investment manager, or fiduciary manager.
SIGNIFICANT DIFFERENCES REMAIN BETWEEN LARGE AND SMALL PLANS
Although small and medium-sized plans now make use of many of the same investment tools as their larger counterparts (for example, de-risking plans, LDI, alternatives), there remain significant differences in approach. In particular, larger plans make use of a greater number of investment managers with more aggressive outperformance targets, have more sophisticated LDI portfolios (often managed on a segregated basis), have more broadly diversified alternatives portfolios, and also review their investment strategy more frequently.
DIRECTION OF TRAVEL IS CLEAR
Responses to the forward-looking questions in this year’s survey suggest that investors will continue to reduce equity allocations in favour of bonds (in particular, inflation-linked bonds and other matching assets) and alternatives (with UK plans continuing to allocate to DGFs). We also expect to see increased interest in a wider range of fixed income assets against a backdrop of falling yields and spread contraction (versus government bonds) across the credit spectrum.
Mercer is a leading global provider of investment services, and offers customized guidance at every stage of the investment decision, risk management and investment monitoring process. We have been dedicated to meeting the needs of clients for more than 30 years, and we work with the fiduciaries of pension funds, foundations, endowments and other investors in some 40 countries. We assist with every aspect of institutional investing (and retail portfolios in some geographies), from strategy, structure and implementation to ongoing fiduciary management.