European pension funds cut equity exposure, says Mercer

Pension fund are reducing exposure to equities and increasing allocations to alternative assets in the face of Eurozone volatility, according to according to Mercer’s annual European Asset Allocation Survey.

Mercer’s annual European Asset Allocation Survey, which questioned more than 1,200 European pension funds with assets of over €650bn, found that 50% of schemes now hold an allocation to alternatives, compared to 40% last year.

Allocations to equities fell across Europe, with the largest falls being seen in the UK and Ireland, where equity weightings are the largest. In the UK, average allocations to domestic and non domestic equities fell by 4% (from 47% to 43%) over the last 12 months, while in Ireland the current average allocation to equities was down 6% to   44% over the same period.

The trend away from equities looks set to continue in the next year. 38.8% of UK schemes are planning to reduce their exposure to UK equities, with only 1.4% expecting to move in the opposite direction. Nearly 24% of UK schemes intend to reduce their overseas equity allocation. Around 20% of schemes across Europe are planning to reduce their domestic or overseas equity allocation.

Hedge funds, emerging markets debt and high yield bonds were the most popular categories across Europe (ex-UK), with almost 20% of schemes having an allocation to one or more of these areas, while in the UK, the most popular alternative asset classes were diversified growth funds, macro hedge funds, also known as GTAA strategies, and funds of hedge funds, with 23.2%, 13.6% and 10% of schemes having allocations respectively.

However, allocations to alternatives remain small relative to traditional asset classes, with allocations of around 3-5% to individual alternative asset classes fairly common. The total allocation to alternative asset classes has reached an average of 8.5% for all surveyed schemes.

Nick Sykes, European director of consulting within Mercer’s investments business, said: “As the Eurozone crisis continues unabated, pension funds are faced with the dual challenge of managing portfolio risk brought on by market volatility, while at the same time identifying opportunities that will generate returns to support future liabilities. In their quest to control volatility without sacrificing long-term returns investors have turned their attention to alternative asset classes

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