German institutions take ‘safety first’ approach to investments

Germany’s institutional investors are not only interested in returns, but also the safety of those returns, according to a study published by Union Investment.

Two thirds of respondents to the risk management survey from the German asset manager cited ‘safety’ as the most important aspect of their decision-making, outweighing 19% who cited liquidity as most important.

Some 83% of respondents described their own organisation as “primarily safety-oriented”.

Some 12% cited the rate of return as the defining criterion of their investment decision, up from 7% last year. Union said this showed “institutional investors are therefore sharpening their focus on the generation of adequate returns, even though this is still a relatively low priority”.

The survey was conducted from June to August, when the eurozone’s debt and political crisis recently came to a peak, as volatility and illiquidity in some pockets of markets spiked. They survey encompassed 42 institutional allocators with a combined €300bn assets.

Alexander Schindler, the member of Union Investment’s board of directors responsible for institutional business, said: “Investors have had a pretty tough time over the past three years or so, during which German government bonds have yielded less than the required minimum rate of return, which is usually at least 4%.

“In the current environment of low interest rates it is virtually impossible to generate adequate rates of return without taking risks. The crucial factor now more than ever is to deliberately exploit market opportunities and mitigate unwanted risk.”

The study also found dynamic tactical strategies are replacing long-term strategic plans and benchmark-based approaches.

Only 17% of respondents said it was essential they not underperform an index, but almost half (45%) said it was key they not miss a minimum absolute rate of return.

“Index benchmarks are no longer useful as target rates of return; relative returns are of no help to investors in the current environment,” the study said.

It highlighted minimum-variance and dynamic capital preservation strategies, satisfying investors’ thirst for higher returns while also mitigating risk, as likely to gain in importance.

The safety-seeking nature of many of the German respondents is reflected in their asset choices.

German institutional investors hold around 84% of their assets in fixed-income securities and money market instruments, with only 9% committed to shares.

Real estate absorbs 5%, and private equity 1%. Hedge funds and asset-backed securities are “virtually non-existent at present”, the study said.

Some 81% of assets are invested in Europe, and 93% of fixed-income holdings are from there.

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