European Institutions Split On Post-Crisis Investment Strategies

As European institutional investors plan their strategies for 2010 and beyond, new research from Greenwich Associates reveals a growing dichotomy arising from the global financial crisis and its after effects After reviewing the events of the prior 18 months and

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As European institutional investors plan their strategies for 2010 and beyond, new research from Greenwich Associates reveals a growing dichotomy arising from the global financial crisis and its after effects:

After reviewing the events of the prior 18 months and analyzing the performance of their investment portfolios, many institutions have come to the conclusion that their strategies were, on the whole, sound. As a result, a sizable share of the institutions participating in this years Greenwich Associates European Investment Management Research Study indicated they were planning to stick with their general philosophy of creating broadly diversified portfolios. To that end, these institutions intend to rebuild allocations to European equities and continue the process of adding to allocations of international equities and alternative asset classes that they began before the onset of the global crisis, says Greenwich Associates consultant Tobias Miarka.

At the same time, a substantial number of institutions are contemplating fundamental changes to their investment approach. Particularly in markets such as Germany and France, where highly regulated institutional investors like insurance companies tend to have a strong influence on the overall market, institutions appear to be reconsidering some of the basic philosophies underlying their pre-crisis strategies and, as a result, are moving quickly to take down risk levels in their portfolios. Among the major shifts now playing out in the German market is a reduction in the amount of assets allocated to external managers, at least in the short to medium term, says Tobias Miarka. And there are strong indications that many German institutions will not attempt to rebuild significant equity positions, but will rather retain larger fixed-income allocations as permanent parts of the portfolio while acknowledging that return expectations need to be adjusted accordingly.

Dramatic Shifts in Asset Allocation

The slide in global asset values from 2008 – 2009 had a dramatic impact on institutional portfolios across Europe, with equity holdings shrinking significantly as a share of total assets and fixed-income allocations expanding. These shifts were not just the result of market impact, however. To the contrary, many European institutions responded to the uncertainty of global crisis by proactively increasing cash positions, shifting assets into passive strategies and seeking refuge in familiar asset classes, namely European fixed income.

Looking ahead to the coming three years, half of European institutions expect to make significant changes to their active European equity allocations. But these institutions are split on direction, with 37% of the total planning significant increases in these allocations and 13% expecting to make significant cuts. The situation is similar with regard to actively managed European government bonds, in which the 43% of institutions expecting to make a significant change in allocation are divided between 19% planning to increase and 24% planning to reduce.

European Asset Managers Battle Unfavorable Market

Pressure is mounting on Europes asset managers. The plunge in asset valuations during the global financial crisis has been followed by a movement on the part of European institutions to reduce their reliance on external managers and bring assets in-house. As a result of these interconnected trends, the pool of assets allocated by European institutions to external managers contracted by 4% from 2008 to 2009.

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