Pervasive Risk Frightens European Institutional Investors

(July 2, 2012) — In these anxious times, it seems, “safe” assets are increasingly difficult to identify.

Anxious European institutional investors see great risk in today’s market and struggle to pinpoint assets that are relatively risk free, a survey by Allianz Global Investors has shown. The study queried 138 European institutions with a total of €880 billion of assets under management or under advice. Taken together, the results show that, while perceptions of risk have abated slightly since last fall, continuing fears about the Eurozone crisis and unease about a sputtering recovery have rattled investors.

“In a risk off environment, the price for safety is rising; some say it has become prohibitive as investors have started to accept negative real returns in exchange for safety,” said James Dilworth, CEO of Allianz Global Investors Europe. “But what is safe today? The answers respondents of the present RiskMonitor gave to these questions are both unsettling and inspiring. They are unsettling, because the variety of answers suggests that truly safe assets can only be found in textbooks nowadays. But acknowledging that investors are starting to operationalize a concept of relative safety is rather comforting. Seeing emerging market debt, quality shares or infrastructure in this context shows that investors have already started to adapt.”

Over 80% of institutions saw overall market volatility as a huge or considerable risk, with just shy of 24% pegging it as the principal financial risk in the next 12 months. Seven out of 10 investors saw a sharp drop in equity markets as a serious concern, while slightly more saw sovereign debt as a significant source of risk. Roughly 40% of respondents regarded limited liquidity as a major potential problem, twice as many as thought so last year. While relatively less acute, anxiety over regulatory and governance risk also grew. More than 50% of those surveyed said they will spend more time dealing with regulatory and governance risks in 2012 than they did the prior year.

The respondents splintered when asked to pinpoint safe assets. Answers were spread out across many asset classes, including quality sovereign debt, infrastructure, hard currencies, precious metals, and money market funds. Much emphasis was placed on “quality,” with institutions favoring quality real estate, quality equities, and quality credit. Remarked one respondent with a UK pension fund, “No assets are safe in the absolute sense. Equities probably have the greatest ability to face future conditions and deliver a real return.”

Those surveyed were more unified when asked how they deal with their biggest financial risk. To that question, almost half said diversification and about a fifth said dynamic asset allocation.

Deep within the survey exist some inklings of optimism. A solid majority, for example, said that the Eurozone would not break up.

To see the survey in full, click here.