June 2013


Romain BoscherTheir liquidity benefits will earn equities a future within investment portfolios, finds Nick Fitzpatrick. But longer term investors will also be prepared to allocate to less liquid assets as they search for yield. If a great rotation is taking place between asset classes it is likely not bonds to equities, but equities to alternatives. Figures from Legal & General Investment Management (LGIM), which also source Towers Watson, show allocations by pension funds in major markets to private equity, hedge funds and real estate between 2009 to 2013 roughly doubled to about 7% of assets under management. Infrastructure and commodities allocations have also grown. Meanwhile, listed equity allocations are falling. People getting older and investing less in equities will favour fixed income assets for some years to come, said Lars Kreckel, LGIM’s equity strategist, recently.
And high capital charges for equities under Solvency II, a regulation for insurance companies, will skew insurers’ holdings towards fixed income. “In terms of a great shift by pension funds out of fixed income into equities, I don’t think that is something we are going to see for some years,” Kreckel says. But Romain Boscher, global head of equities at Amundi (pictured), is confident about the asset class’s future. Though equities face “many headwinds”, he points out that the Euro Stoxx, with dividends reinvested, has hit levels recently that are only 4% off historical highs. “In relation to fixed income returns, when interest rates are zero or close to zero you are forced to reconsider equities at some point. It’s a risk to post negative real returns. Investors cannot even achieve their need for yield through corporate bonds.” He points also to risks in equities and signs that regulatory authorities and central banks are easing their attitudes to the asset class. “People think equities are really risky. Even the regulatory authorities had excluded equities from their regulatory calculations and central banks never considered buying them as part of their stimulus programmes. But the story is different now.” He says regulatory bodies are officially considering equities under Basel III, a bank solvency regulation, potentially allowing a 15% allocation among assets recognised as liquid. He points out that the Bank of Japan (BoJ) and Swiss National Bank (SNB) have been buying equities. In May, the BoJ spent $500 billion on equity ETFs, and in the first quarter the SNB’s equity holding climbed from 12% to 15%. It has been difficult to get clients back into equities, Boscher says. But what Amundi is doing is focusing on risk management tools to build less risky portfolios and providing minimum variance funds. Boscher says the best performing equities over recent years have also been the less risky. “Investors know it is essential to be able to not necessarily post the best performance, but to reduce drawdown. Investors are coming back with a new approach, not necessarily seeking capital gains but yield.” Beyond just equities, Boscher says long-term investors, such as certain pension funds, are recognising they are less sensitive to liquidity risk and will consider holding more illiquid assets. He says Amundi is also looking at more passive solutions, and he believes that there is a narrowing in the industry’s divergence in fees between smart beta funds, where they are rising, and active management, where they are falling. *Pictured is Romian Boscher, Global Head of Equities at Amundi
©2013 funds europe

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