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European institutional investors have low risk appetite

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European institutional investors emerged from the worst days of the global market crisis with a diminished tolerance for risk and serious doubts about the ability of their investment managers to deliver value through active management.

Rather than fading as markets returned to a more normal footing, these altered perceptions seem to be taking root, as evidenced by the increasingly conservative investment strategies currently in place among European institutions.
 
In the first half of 2010, Greenwich Associates interviewed representatives of 381 of the largest institutions in Continental Europe. In these conversations, participating institutions made it clear that their primary concerns for the remainder of this year involved risk management, asset protection, complying with new regulations, and monitoring a burgeoning government debt crisis that seemed to pose a risk to the nascent economic recovery.

Although institutions also expressed concerns about generating higher levels of investment returns or alpha, this topic received much less mention.
 
In general, European institutions are sticking with fixed income rather than moving assets back into equities.

“Institutions are aware of the need to achieve higher levels of returns in order to fund long-term liabilities or otherwise meet their obligations. However, in light of the regulatory framework many have to comply with and a further decreased risk appetite, they do not see a better alternative to their current conservative, fixed income-oriented allocations, thus further deferring substantial changes of their asset allocation,” says Greenwich Associates consultant Tobias Miarka.
 
Assets under management by institutions in Continental Europe increased 18 per cent from 2009 to 2010. The gradual recovery in AUM was largely consistent across all of Continental Europe’s regional and country markets and in some countries portfolio assets have begun to approach pre-crisis levels.
 
Virtually all the growth in institutional portfolios from 2009 to 2010 can be attributed to appreciation of asset valuations in step with a strong recovery in global financial markets. However, during a 12-month period of strong performance in European and global stock markets, equity allocations within European institutional portfolios increased by only about one and a half percentage points, growing from 17.8 per cent of total assets in 2009 to 19.4 per cent in 2010. Allocations to European equities actually decreased to 11.3 per cent in 2010 from 12.1 per cent in 2009, while international equity allocations increased to 8.1 per cent from 5.7 per cent.
 
In light of the relatively small increase in equity allocations it is clear that European institutions are not moving to rebuild equity allocations that were reduced during the crisis. Over the same period, allocations to European bonds increased to approximately 57 per cent of total assets from 52 per cent.
 
As always, institutional allocations vary considerably from country to country across Europe. In France and Belgium, fixed income investments represent two-thirds of institutional assets, with equities making up only at about 20 per cent. At the other extreme, Swedish institutions allocate approximately 35 per cent of assets to fixed income, with equities making up almost 45 per cent.

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