German institutional investors are devoting more than three quarters of their investment capital to return-seeking asopposed to liability-matching assets.
Research firm Greenwich Associates says the 200 German institutional investors it interviewed are adjusting investment strategies and portfolio allocations as they try to generate yield amid low interest rates and declining return expectations.
In its latest report, 2013 Greenwich quality leaders in German investment management, the firm says German institutions are reducing allocations to passive fixed income while diversifying active fixed-income portfolios.
Over the past 12 months institutions have increased allocations to active global bonds, emerging markets debt and high yield.
Greenwich also says expectations are that the current low-interest rate environment will persist longer-term and have prompted a “dramatic extension of duration with institutions [which] now report holding virtually no fixed-income assets with less than five years duration”.
Government bond exposure is expected to decrease further, with emerging market debt, high yield and active global bonds anticipated to continue to be beneficiaries over a three-year time horizon.
“Historically low interest rates are pressing German institutional investors to diversify their investment portfolios and to utilize specialized strategies as they seek out new sources of yield,” says consultant Lydia Vitalis.
Across all German institutions, mean actuarial earnings rates declined from 4.3% in 2011 to 3.7%. Meanwhile, expected rates of returns on all asset classes have also fallen.
In 2011, Greenwich says, expected annual returns on fixed income holdings for the next five years averaged 3.7%, a rate that has fallen to 2.9%.
Expected returns on domestic and European equities dropped from 6.3% to 5.9% over the same period, and expected returns on international equity have fallen to 6.2% from 7%.
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