European pensions to boost allocation to alternatives

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Cerulli Associates has published its 2015 European Institutional Dynamics report.

According to the study, European pensions are set to boost allocations to various alternative investment classes but the high demand reduces the returns they can expect from some of the strategies.

A survey conducted in conjunction with Cerulli’s report finds out that almost 70% of European pensions have plans to increase their exposure to infrastructure over the coming three to five years.

Institutional investors reveal that the need for diversification is a main driver in their quest for alternative strategies.

Europe’s largest investors assess that the yields from their core holdings are inadequate, and that markets for some mainstream assets are pricey, says Cerulli.

The report also shows that winning new institutional businesses is a challenge for alternative managers.

Solvency II appears as one of the main issues they have to manage, especially on the insurers’ side.

“Europe’s insurers must weigh up the value of alternatives in light of proposed high capital charges under Solvency II, and recent returns from some alternatives classes that seem at best mediocre.

“The reporting rigors insurers will face under Solvency ll are an additional pressure on alternative managers that insurers select, making full transparency and regular data updates essential services these days for all managers to make headway with European insurers,” Cerulli explains.

Fees are considered as another possible roadblock for investing in alternatives strategies. However, European pensions have told Cerulli that they consider risk management as more important than fees.

“Pre-crisis, being ‘alternative’ often denoted a willingness in a manager to take risks trying new things—hedge
funds making illiquid investments using side pockets, for example,” said David Walker, director at Cerulli and lead author of the report.

“That was then, but now, ‘alternative’ for an institution mainly means a manager generating returns while controlling risk. Managers should explain to Europe’s institutions what they are good at, what they will not do, and stick to it,” he added.

The report points outs that the institutions’ hunger for non-mainstream assets raises because they have understood that prevailing yields on core debt holdings alone will not generate the returns they need to honor their own promises to customers.

But Laura D’Ippolito, senior analyst at Cerulli, observes : “The hunt for yield is not limited to the alternatives space.

“European institutions are also looking for further diversification within their fixed-income investments, and are considering strategies such as emerging market debt, bank loans, and credit.”


Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is deputy editor and French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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