Schemes increasing allocations to non-traditional assets

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."

This comes as a survey by bfinance revealed European and North American pension schemes were set to increase equity allocations at the expense of fixed income.

The consultant's latest Pension Funds & Insurance Asset Allocation Survey found 46% of pension funds planned to increase their equity exposure over the next twelve months. Only 35% anticipated a decline.

In addition, 42% of schemes said they foresaw a decrease in their fixed income exposure over the coming year - while only 25% expected an increase in their bond exposure.

Bfinance said, since its last survey, 44% of pension funds had seen their allocation to fixed income increase.

bfinance chief executive David Vafai said: "The survey indicates a surprising change of sentiment from investors with almost half of the respondents expecting an increase in their equity exposure in the next twelve months compared with 19% in our survey last October.

"The results seem to suggest that investors think that the worst of the financial crisis is over."

Respondents also indicated a move towards greater diversification, favouring alternative asset classes such as infrastructure and private equity.

bfinance said 24% of respondents increased their infrastructure exposure and 16% increased their private equity exposure. Investors said they had also increased their exposure to commodities and property (13% and 12% respectively).

The consultant added the proportion allocated to alternatives has increased partly as a result of the drop in the value of core assets such as equities, creating a gap between investors' strategic and actual asset allocations.

Investors also showed to be more favourably disposed towards active management compared to last October. bfinance said 20% of investors said they would increase active management.

Vafai said: "This seems to suggest that the strong negative sentiment towards active management last October immediately following the sharp downturn in the financial markets may have been neutralised, possibly as a result of the recent market rally."

Respondents said the crisis would cause them to further diversify outside of domestic markets, with 34% saying they would decrease their domestic allocation as a result of the crisis, compared with 19% in October 2008.

The majority of respondents (58%) said the crisis has not yet caused them to review their investment policy. Among those (60%) who said that they will review it in the future, 70% state that they will do so within the next six months.

Thirty per cent of investors indicated they would increase their reliance on investment consultants for manager selection.

bfinance said 52% of respondents were based in Europe, while 48% in North America. Within Europe, almost half (46%) of respondents are based in the UK.