European pension funds increase weightings in alternatives

The survey of over 1,000 European pension funds with assets of €400 billion found that 35% of UK schemes and 60% of European schemes (excluding the UK) expect to introduce new investment opportunities into their portfolio to help manage future investment risk.

In Germany schemes increased allocations to 11% from 10% last year while Dutch schemes raised weightings to 11% from 9% and the UK by 2% to 6%.

UK schemes favour hedge funds, global tactical asset allocation and active currency as diversification strategies. Since the survey was completed, over half of the UK schemes have allocated to these asset classes, Mercer said.

Nine per cent of British schemes have allocated to funds of hedge funds (FoHFs). Only 2% of UK schemes invest directly in hedge funds with an average allocation of 9% among those that do.

In Europe 14% of pension schemes have allocated FoHFs, 12% to commodities and 10% to high yield bonds. Of the 5% investing in single strategy hedge funds, the average allocation is 12%.

"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," commented Tom Geraghty, European head of Mercer's investment consulting business. "Funds are now looking at ways to manage the risk inherent in their schemes, mainly through further diversification of their assets," he said.

Over two-thirds of schemes surveyed have conducted investment reviews due to the financial crisis, with almost 70% reviewing counterparty risk and over half looking at cash management programmes.

The survey showed over 70% of schemes plan to review their stock lending programmes and 46% will review transaction costs.