UK pension schemes have reduced their equity exposure at the slowest rate since the financial crisis, according to Mercer’s annual European Asset allocation Survey.
Equity allocations have nearly halved in the last decade among UK schemes, but the survey found the pace of exit has slowed from an average of four percentage points a year over the previous five years, to just two percentage points over 2013.
The survey, which looked at the asset allocation of over 1,200 European pension funds with combined assets of over €850bn, found that across the rest of Europe, the average equity allocation was broadly flat over the year.
Mercer European Director of Strategic Research Phil Edwards said counter-intuitively, weak economic growth of the last few years has coincided with exceptionally strong equity markets.
He added: “The rising market and improving sentiment are likely to have been the key supports to equity allocations over the last year, though there remains scant evidence of any ‘great rotation’ in institutional portfolios.
“Many markets have risen in response to the ultra-stimulative monetary policy pursued since 2009 – as a result, prospective returns are arguably uninspiring across a range of asset classes. We expect institutional investors to meet this challenge by responding more dynamically to changing market conditions and introducing a wider range of return drivers into portfolios.”
Despite the slow-down, Mercer believes the long-term trend away from equities is set to continue over the next 12 months, with 28% of investors looking to reduce domestic equity allocations and a quarter suggesting they will reduce non-domestic equity allocations. At the same time, more than 20% of plans indicated that they intend to increase the allocation to bonds, with index-linked gilts, corporate bonds and matching assets expected to be the main areas of interest.
The survey also found that, in stark contrast to retail investors, institutional investors have shown no sign of rushing out of emerging markets following the difficulties experienced by a number of emerging economies over the last 12 months. Almost half of the schemes surveyed have exposure to emerging market equities and almost a fifth have an allocation to emerging market debt, demonstrating a commitment to the long-term return potential of these markets.
Mercer added that while diversified growth funds are now a well-established means of diversification, with almost a fifth of all plans having an allocation to such a strategy, multi-asset credit strategies are also set to grow in popularity.
“Multi-asset credit has been one of the recent beneficiaries of the continued move away from traditional benchmark-oriented credit mandates and we expect to see further activity in this area over the course of 2014,” said Edwards.
“We have also seen continued manager search activity and an up-tick in allocations to private debt as institutional investors look to exploit the opportunities arising from bank deleveraging in Europe.”
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