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Schemes increasing allocations to non-traditional asset

Date: Wednesday, April 22, 2009
Author: Global Pensions.com

Schemes are increasing their allocation to non-traditional asset classes in a bid to manage their risks more effectively, Mercer says.

The consultant’s European Asset Allocation Survey – which polled around 1000 schemes from 11 countries – found 35% of UK schemes and 60% of European schemes (excluding the UK) expected to introduce new investment classes into their portfolio to help manage future investment risk.

Mercer investment consulting European head Tom Geraghty said: “Despite being innately diverse in history, culture and regulatory requirements, European pension funds have all felt the effect of the last year’s market turmoil.

“Funds are now looking at ways to manage the risk inherent in their schemes, mainly through further diversification of their assets.”

Findings showed in the UK schemes favoured hedge funds, GTAA and active currency. The survey found over 50% more UK schemes have allocated to these asset classes in the last year.

In the rest of Europe, schemes favoured hedge funds (14% had an allocation), commodities (12%) and high yield bonds (10%). 

While bonds continued to be the dominant asset class in most European countries, Mercer said an increasing number of funds were diversifying to non-traditional investment opportunities.

The survey also found the reduction in benchmark allocations to equities in markets with traditionally high exposures was accelerated by last year’s market turmoil.

In the UK the allocation fell from 58% in 2008 to 54% in 2009 and in Ireland from 67% to 60%.

In addition, the survey showed exposure to equity markets remained low across other European markets.

Mercer principal Crispin Lace said: “Both in the UK and Ireland the move away from equities is driven by both the market downturn and the increasing maturity of schemes.

“As schemes close they tend to reduce their exposure to equities in favour of bonds with the average closed scheme having a bond exposure that is around 10 percentage points higher than the average open scheme.”

For the future, in the UK and Ireland, 33% and 47% of schemes respectively have indicated they are planning a further decrease in equity exposure over the next 12 months, following a generalised shift towards fixed income in 2008.

Over two thirds of respondents said they had either undertaken investment related reviews in 2008 or intended to do so in 2009.

Of those, close to 70% reviewed their counterparty exposure risk in 2008 and over half reviewed their cash management. Specifically, over 70% expected to review stock lending programmes in 2009 and 46% planned to analyse transaction costs.

“Many schemes were not aware of the additional risk being run within their stock-lending programmes or collateral management programmes elsewhere in their portfolio,” said Lace.

“While many schemes did review their counterparty risk and stock lending exposure last year, the majority will continue to keep a close eye on this part of their portfolio to avoid any nasty surprises going forward.”