Survey: European Investors Flock to Fixed-Income

(June 27, 2011) — New research by Invesco has shown that European pension funds and other institutional investors have increased their fixed-income allocation to the highest level in five years, with corporate bonds being the main focus of investors’ growing interest in the asset class at the expense of government debt.

At the same time, Invesco’s survey — which collected responses nearly 150 European pension funds and insurance companies with more than €1.2 trillion (US$1.7 trillion) in combined assets under management — showed that institutional investors reduced their allocation to equities. “Overall, the 2011 survey results give a mixed picture of investor confidence,” said Invesco managing director and head of institutional business Germany, Michael Gartmann.

Invesco’s 11th European Institutional Asset Management Survey (EIAMS) revealed that allocations to fixed-income rose to 58% in 2010, up from 51% the previous year and the highest level since 2006. Equities fell back to 27% of assets in 2010 from 29% in 2009. However, they are still above its level of 25% in 2008 during the financial crisis. Fixed income continues gaining more ground,” Gartmann added. “Last year’s freefall in equities appears to have been halted with just a small decline, and the sharp reduction in cash suggests investors have spotted more attractive opportunities.”

Alternatives remained at approximately 12% of portfolios, while real estate stood at 7% of portfolios. Cash holdings fell to 2% of portfolios down from 5% in 2009 and 10% the previous year.

Additionally, the survey found that consultants had fallen further out of favor across most regions, with a 3% drop in overall usage to only 49%. “Use of consultants has continued its decline, now standing at below 50%,” the study said. “The Italians, who experienced a dramatic reduction in their use of consultants last year, are now the biggest users, followed closely by the British & Irish…Following the crisis, risk management advice is increasingly being sought. Investors are also obtaining more advice on their ‘internal processes’.” Consultancy use in the UK remained steady at 83%, while the Central and Eastern European (CEE) countries showed a significant dip, dropping from 33% to just 7%, the survey showed.

“Asset allocation is now the top reason for using consultants, followed by selecting investment manager and risk management advice. Investment performance measurement and alternative investment advice show an increase again, indicating that the overall fall in usage may have been a short-term reflection of the recession,” Gartmann said.

The survey’s optimistic outlook on pursuing fixed-income can also be seen among hedge funds. According to a May report by BarclayHedge and TrimTabs Investment Research, emerging markets and fixed-income strategies account for about half of all hedge fund inflows in 2011. “The strength of flows into fixed-income is remarkable,” Vincent Deluard, Executive Vice President of Research at TrimTabs, noted in a statement. “Hedge funds investors and retail investors alike are keen on the space, while speculative traders and the Fed are buying Treasuries in size.”

Another study in May confirmed the trend away from equities in an effort to lower volatility and reduce risk, with a survey by consultancy Aon Hewitt showing that US corporate pensions are increasingly adopting liability-matching investments. “Once just a strategic idea without much traction, liability-matching investments continue to grow as a proportion of plan assets,” Ari Jacobs, retirement strategy leader at Aon Hewitt, noted in a statement. “Regardless of the future direction of equity and bond markets, this shift should bring less volatility and greater predictability to pension plan costs.”

Aon’s findings showed that plan sponsors are primarily shifting assets to liability-matching investments with long-duration corporate bonds as the most popular asset choice. Nearly 32% of plan sponsors expected to increase allocation to long-duration bonds and 24% expect to increase allocation to other corporate bonds, while just 13% expect to do so for government bonds.