German Institutions Reverse Out of Equities

Partly as result of the declines in the stock markets, and partly as result of shifts in their investment policies, German institutions have gone from a previously increasing reliance on equities to a dramatic decrease. This is the key finding

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Partly as result of the declines in the stock markets, and partly as result of shifts in their investment policies, German institutions have gone from a previously increasing reliance on equities to a dramatic decrease. This is the key finding of a recent study by Greenwich Associates.

The proportion of European stocks in the average German institutional portfolio fell from 22% to 16% in the last two years, and the proportion of other stocks from 4% to 3%, so the total fell from 27% to 19%. “This is a huge shift in such a relatively short time,” Greenwich consultant Berndt Perl notes.

Chief beneficiaries of the move out of stocks are, not surprisingly, bonds and cash. German institutions’ bond allocations are up from 55% of assets to 60% since Greenwich Associates’ last in-depth study two years ago, and cash holdings have soared – from 4% of assets to 9%.

T wice as many institutions expect their allocations to active European equities to fall by 2004 as expect them to rise. By contrast, as many expect a rise as a fall in allocations to passive European equities, and far more expect their use of non-European equities to rise than expect the contrary.

German institutional investors indicate their use of cash may decline, with the money moving into bonds – both European and non-European, into real estate, and into such “alternative” asset classes as private equity and hedge funds.

40% of German institutions hired a manager in 2002, but the overall number of managers used by institutions on average stayed the same, at 5.8, and expectations for future averages, once well over six managers per institutions, suggest future averages will be flat to down.

“This hiring activity is increasingly dominated by switches rather than new hires, with 69% of all new hiring by German institutions following a termination,” Berndt Perl notes. One third of all sponsors fired a manager within a single year’s time.

For investment professionals at most German institutions, “recent salary increases have tended to be few and far between, and bonuses on the low side,” Berndt Perl reports.

Average salaries for German institutional investment professionals rose only marginally from €88,500 in 2001 to €88,900 in 2002. For those at corporate pension funds, they rose on average from €102,200 to €103,400; for those at insurance companies, from €83,400 to €85,400; and for those at savings banks, from €81,300 to €82,400. For investment professionals at public and industry pension funds, however, average salaries declined – from €85,500 to €76,400.

Bonuses paid at the end of 2001 averaged €13,400. Professionals at corporate pension funds again tended to earn the most, an average bonus of €17,900, and those at public and industry funds the least – €7,200.

In April and May, 2002, Greenwich Associates conducted interviews with professionals at 203 of the largest sponsors of Spezialfonds and other external asset mandates based in Germany. Institutions included corporate pension funds, public pension funds, industry pension funds, corporate treasury funds, churches, foundations, insurance companies, and banks. Interview topics included asset allocation, the hiring and termination of managers, market trends, and compensation.

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