Europe’s institutions want yet more bond funds, study finds

European institutional investors last year used cash reserves and sold equities to leave the sidelines and boost fixed income allocations to their highest levels in five years, research shows.

Short-term market performance suggests their timing was bad, but fixed income remains sought-after, as more than 20% of respondents to the allocation survey by Invesco plan increasing fixed income.

But they are selective. Some 31% are reducing sovereign debt holdings, while 30% are opting for corporate bonds.

Invesco’s European Institutional Asset Management Survey found overall fixed income holdings were boosted from 51% to 58% during last year – the highest since 2006.

Equities meanwhile fell from 29% to 27%. This was a trim, but is still well above the 2008 level of 25%.

Last year the S&P 500 index cum dividend returned 15.1%, more than double the 7% from the Barclays Capital Government/Credit Bond index. This year to 31 May the S&P is up 7.8%, again more than double the 3.3% from the fixed income benchmark.

Alternatives and real estate remained at about 12% and 7% of European investors’ portfolios.

They more than halved cash holdings from 5% to 2%, following the halving in 2009 from 10%.

“Overall, the 2011 survey results give a mixed picture of investor confidence,” said Michael Gartmann (pictured), Invesco managing director and head of institutional business Germany.

“Fixed income continues gaining more ground, last year’s free-fall in equities appears to have been halted with just a small decline, and the sharp reduction in cash suggests that investors have spotted more attractive opportunities.”

Corporate bonds were the main focus of investors’ growing interest in fixed income at the expense of government debt, the survey found.

The survey also found an increasing focus on emerging market debt due to concerns over inflation, low government bond yields and the growing perception that developed economies’ debt can no longer be viewed as risk-free.

But despite the growing dominance of fixed income, 19% of investors are poised to raise their equity stakes and 26% their real estate allocations. Only 15% and 7% respectively plan to cut these classes.

Meanwhile, the survey suggested popularity of exchange traded funds (ETFs) was slipping, with their use falling from 34% to 28% over the year.

While retail investors continue to flock to this asset class as a transparent and low-cost investment vehicle, the survey indicates institutional investors prefer alternative cost-saving solutions such as segregated passive accounts or derivatives.

Meanwhile, the trend towards the use of external managers continued, with 67% of respondents now using external managers, up from 64% in 2009.

However, investors seem to be more willing to play the field, with the number of investors terminating their relationships with external managers rising to 53%, from 40% in 2009.

“Poor performance as ever is usually the trigger, but many investors seem to be venturing into new territory – and will sack those managers who cannot chart the way,” said Gartmann.

“Having weathered the first storms of the recent financial crisis by sticking to the tried and tested, investors now feel they are in a position to flex their muscles,” he added.

David Walker

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