UK pension schemes have reduced their equity exposure by only 2% over 2013, which is the slowest rate since the financial crisis, Mercer has said.
According to Mercer's annual European Asset Allocation survey, in the UK where equity allocations have nearly halved in the last decade, the pace of exit has slowed from an average of 4% a year over the previous five years, to 2% over 2013.
The survey, which looks at the asset allocation of over 1,200 European pension funds with combined assets of over €850bn, revealed that the average equity allocation across the rest of Europe was broadly flat over the year.
Phil Edwards, Mercer's investment business European director of strategic research, said: "Perhaps counter-intuitively, the weak economic growth of the last few years has coincided with exceptionally strong equity markets.
"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."
Mercer said that alternative asset classes continue to gain traction with European investors with the proportion of European plans having an allocation to alternative assets rose from 44% to 53% over the last year.
Real assets are the most widely used category of alternative asset, with 41% of plans currently holding an allocation.
Within property allocations, interest has shifted towards less traditional parts of the market such as long leases, debt and second-tier property.
Mercer also said that 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.
More than 20% of the schemes said that they intend to increase the allocation to bonds, with index-linked gilts, corporate bonds and matching assets expected to be the main area of interest.
Regarding liability-driven investment (LDI) strategies, the proportion of schemes making use of these increased from 26% to 29% over the year.
Edwards said: "Despite the relatively small increase in the use of LDI strategies, the management of interest rate and inflation risk remains a high priority for pension plan trustees.
"The complexity and governance challenges around LDI may have acted as a barrier for smaller schemes in the past, but given the range of pooled and delegated LDI approaches now available, we expect to see the gap in take-up between large and small schemes reduce over time."
First published 15.05.2014
monique_simpson@wilmington.co.uk
