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Mercer's European asset allocation survey

Contact: Lianne Suckling
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2008 European asset allocation survey


 

 

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Introduction

Asset classes by region

UK funds

Europe and Ireland (excluding UK)

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Introduction

Mercer's investment consulting business is proud to present our third pan-European survey, covering 1,104 funds with assets totalling €538 billion. Of which, are 849 UK pension funds with assets totalling €379 billion (£265 billion).

 

In 2006, we broadened the survey's scope by including funds from continental Europe and Ireland. This year Europe (excluding the UK) is represented by 255 funds with assets amounting to €159 billion.

Asset classes by region

Bonds continue to be the dominant asset class among continental European funds. French, German and Portuguese funds invest more than 60% of their assets in bonds, on average.

 

Interest in 'other' assets remain strong. This category includes cash, various hedge fund strategies, global tactical asset allocation, active currency management and private equity.

 

The following illustrates these findings: 

 

Asset class split by region (2008)

 

UK funds

Changes in asset allocation

The average equity allocation of UK funds is now 58% - when viewed as an average overall funds. The cumulative fall since 2003 is 10%. However, this fall actually represents a greater switch away from equities than would first seem apparent, as strong equity market performance since the market lows of March 2003 would nautrally resulted in an increase in equity allocaiton.

 

This is shown in the graph below:

 

Changes in asset allocation

Other assets

The chart below breaks the exposure to 'other' assets, showing the proportion of funds investing in each underlying category of 'non-traditional' assets and the proportion of total spend on alternative assets directed to each asset class.

 

 

Allocation to alternative asset classes (UK)

 

In the UK, property continues to dominate the landscape for alternative investments, accounting for over 40% of the total spend on alternatives.

 

As can be seen, the findings show that hedge funds, GTAA and active currency management remain the most popular alternative asset classes.

Anticipated changes in 2008

Risk management, not to be confused with risk reduction, is anticipated to continue to dominate over the coming year. This is likely to manifest in the form of:

 

  • Overlays and fund-specfic benchmarks for bond mandates.

  • Diversification of sources of risk remains another recurring theme. Around one in ten funds has indicated an interest in adding exposure to funds of hedge funds, active currency and GTAA.

Europe and Ireland (excluding UK)

Asset Allocation

The equity allocation of European funds (excluding UK) has continued to increase from 40% at the start of 2006, to 42% at the start of 2007, to 50% in 2008. These findings are highlighted in the following graph:

 

Europe ex-UK allocation: Country-specific

Other assets

The following chart breaks down the exposure to 'other' assets, showing the proportion of funds investing in each underlying category of 'non-traditional' assets and the allocation to each type, for those funds that are investing.

 

Allocation to alternative asset classes (Europe ex-UK)

Anticipated changes in 2008

There is still continued focus on risk management across the countries survy ed. In general, there appears to be an emerging preference for passive management against fund-specific benchmarks. However, the Dutch seems to lean towards actively managed bond portfolios measured against fund-specific benchmarks, and shows an egarness for using derivatives strategies to mitigate risk.

 

Additionally, diversification of sources of risk-taking is likely to be driven by increased exposure to active currency and GTAA strategies.

 

There is also a limited interest, in common with the UK in making additional allocations to private equity or initial allocations to infrastructure and timber.

 


Mercer is a leading global provider of investment consulting 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 35 countries. We assist with every aspect of institutional investing (and retail portfolios in some geographies), from strategy, structure and implementation to ongoing portfolio management. We create value through our commitment to thought leadership; world-class, independent research; and top-notch consultants with local expertise.