Institutional investors in Europe are increasing their allocations to alternative assets in the face of a challenging environment for conventional risk assets, according to a survey by Mercer.
In its 2015 European asset allocation survey, Mercer found that the average allocation to alternatives rose by 2% to 14%, while passive management of equities and bonds rose by 4% and 7% respectively. Mercer said this suggested that European investors are more inclined to seek returns from manager skill, or alpha, from alternatives and to harvest cheaper market returns, or beta, from core bond and equity portfolios.
Mercer Investments European director of strategic research, Phil Edwards, commented: “The combination of low and even negative yields across a number of Eurozone bond markets, modest risk premia, and rising volatility creates a challenging environment for return generation. To meet their objectives, investors will need to challenge their existing beliefs and processes and embrace less familiar asset classes and less constrained strategies.”
The survey was based on 1,100 European institutional portfolios in 14 countries with assets of over €950 billion. In the UK, research found a larger-than-average shift to alternatives, with a 6% fall in equity allocations over the last two years going into alternatives portfolios. Another finding was an increased focus on environmental, social and governance (ESG) factors within the investment process. Edwards said: “Stakeholders are addressing ESG factors at many different levels – but notably as part of manager selection and monitoring – and increasingly rely on their advisers to understand the extent to which their managers, be they active or passive, incorporate ESG factors in their investment process.”