A new survey confirms that hedge funds and private equity partnerships are benefiting from the steady switch towards alternatives by institutional investors.
The results of Invesco's fifth annual European Institutional Asset Management Survey (EIAMS) show that despite the improving market environment, European institutional investors maintained their cautious stance towards equities in 2003.
"Surprisingly, investors' weightings in equities remained relatively stable in 2003 despite the good market return," says Yves van Langenhove, Head of Institutional Sales Invesco Western Europe, citing from EIAMS 2004, which covered investors in the Benelux countries, France, Germany and Italy representing total assets under management of EUR 518 billion.
On the lookout for higher yields, the surveyed investors say they will focus on investment grade corporates, high-yield corporates and emerging market bonds in the fixed-income segment.
Regarding equities a growing number of institutional investors plan to reduce their exposure to US equities, while increasing their allocations to Pan European, Asian and Japanese equities.
Growth in alternative allocations
Last year's results correctly projected an increase in alternative investments. The hedge fund weighting among European institutional investors has doubled to 2 percent and the private equity portion increased from 0.6 per cent to 1.3 per cent. The survey also noted growing interest in foreign-domiciled UCITS. Enhanced cash strategies were also in high demand. Demand for traditional cash products is expected to continue to decline, while demand for enhanced cash products is forecast to increase. Despite good results for the real estate sector, the real estate weighting declined from 5 to 3 per cent.
Investors have lengthened their investment horizon over the past few years. As in 2003, the highest proportion, or 36 per cent, of respondents had a 5-to-10-year horizon. Only 12 per cent reported a 1-to-3-year investment horizon.
The proportion of investors that delegate asset management to external fund managers has remained stable, with 53 per cent of total AuM managed externally. When selecting an external asset management partner, the surveyed institutions focus above all on risk control, performance and the clarity of the investment process. Product innovation, however, also seems to be gaining importance.
This year's survey showed another increase in the use of external investment consultants to an average of 36 per cent, with manager selection being the main task. In Italy, half of all investors employed a consultant, mostly for asset allocation decisions. Only 28 per cent of German investors employed external consultants, but the trend is pointing upwards.
On average, 44 per cent of the institutional investors currently use funds of funds. At 72 per cent, however, the ratio is much higher - and increased once again - in France. Funds of funds appear appear to be used above all to diversify high-risk investments.
Meanwhile, investment policy objectives seem to be undergoing a trend reversal. Investors cited the level of risk as the key factor in setting investment policy, followed by absolute performance in second place and relative performance in third place.