European institutions increase alternatives and passive

Mixed chartEuropean institutional investors have increased investments in alternative assets by €30 billion in the past year in response to a lack of attractively priced assets.

The average allocation to alternative assets has increased from 12% to 14% of plan assets, according to the 2015 European Asset Allocation survey, carried out by consulting firm Mercer.

Mercer’s survey, which analysed the asset allocation of around 1,100 European institutional portfolios with total assets of more than €950 billion, found that the shift for UK plans was even more marked. The results show a reduction of six percentage points in equity allocations over the last two years, with allocations going almost entirely to alternatives portfolios.

The research also finds that the use of passive management in equity and bond holdings has increased. On the equity side, the average scheme now has 49% of its assets invested passively, up from 45% in 2014.

On the bond side the use of passive management has increased from 37% to 44% of assets.

Mercer says this reveals that while European investors are seeking alpha from alternative and unconstrained mandates, they are also aiming to balance this with a supply of cheaper beta in core equity and bond portfolios.

Phil Edwards, European director of strategic research in Mercer's investments business, says: “Our findings suggest that investors may be redeploying active management risk budgets towards alternatives portfolios. There is, however, a considerable variation in behaviour by plan size and governance budget, with larger investors exhibiting a greater use of active management across all parts of their portfolio alongside a tendency to invest via less constrained mandates.”

A further finding of the survey was that there is an increased focus on environmental, social, and governance (ESG) factors. Only 35% of respondents reported not considering such factors in this year’s survey, compared to nearly half (48%) in 2014. Key drivers behind the focus on ESG factors were the potential financial impact and reputational risk.

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