Institutional investors respond to market turbulence
Amid market uncertainty, how are investment professionals responding? Markus Neubauer, managing director, Universal-Investment shares his views.
Universal-Investment’s client data provide a by-and-large representative view of institutional investors’ activities in Germany. As the operator of Germany’s largest independent platform for institutional investments, Universal-Investment analyses all the investments in special AIF or segregated mandates which it administers as Master KVG, which is in many ways comparable to third party administrators. This analysis is performed from the perspectives of investor type, asset class and performance, and aggregates the results from January 2012 to the present day. It is the investors who decide on their strategic asset allocations, while the choice of tactical allocation to the segregated mandates is always made by external asset managers.
The current analysis covers all assets in segregated mandates which were administrated by Universal-Investment over the period 1 January 2012 to 28 February 2017. The figures are updated monthly. The total volume of analysed assets is currently around €225bn. This is 15% of the total €1.480trn of assets held in segregated mandates in Germany as at the end of January 2017, as published by the German investment association, Bundesverband Investment and Asset Management (BVI).
Equity on the rise
Over the past five years, equities have become increasingly attractive for institutional investors compared with bonds as the traditional safe haven for investment. On average, one third (32.4%) of institutional fund portfolios were invested in equity, according to the data snapshot. This is nearly 10% up from the 22.8% at the start of the analysis in 2012. For most investor groups, the higher proportion of equities in their current portfolios may be explained by factors such as asset price rises, which would have encouraged them not to choose to re-allocate. That rise in equities is offset by the allocation in fixed income investments, where the share has shrunk from more than half (56.2%) in January 2012 to 44.2%, a low at the time of the snapshot.
A closer look reveals that traditional investment patterns in the bond sector are being undermined. For some time now, the market has been seeing a steady shift away from government bonds towards corporates – allocation to corporate bonds has risen from 18.8% in January 2012 to 34.3% at the end of February 2017. This segment effectively now plays a bigger role in institutional portfolios than government bonds, which are down from 32.5% in January 2012 to a 23.9% in February 2017. Within the government bond sector, Bunds have been most affected. At the start of 2012, German government bonds accounted for 7.7% of total fund volumes, but are now down to 2.7%.
Apart from broader diversification within the equity asset class and increasing allocation to the corporate bond sector, institutional investors are increasingly turning to real assets to minimise volatility. As a result, property now accounts for €9.5bn, or 4%, of their portfolios. Participation and infrastructure projects add another €16bn or 7.7% to this figure, boosting the real-asset and property quota to approximately 12%. This is in marked contrast to the figure less than 1% at the start of 2012. Given already committed property investments, the administered volume might rise to approximately €12bn in coming years.
Over a long-term period, the average performance of the analysed portfolios homes in on around 4% – a key threshold value for many investors. Looking back over the 10 years ending 28 February 2017, performance is 4.01%. This stable longer-term performance is apparent for 2012 through 2016, despite some very volatile periods. Looking at calendar years, 2016 was even well above average with a performance of 4.72% – especially after the cold start in Q1.