| Alternatives gain ground among European investors |
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| 09/12/2007 | |
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Pension funds have modestly increased their allocation to alternatives in the last five years, representing 13% of the average portfolio of funds surveyed by JP Morgan Asset Management. Hedge fund investments posted the biggest increase across Europe, where both incidence and levels of investments have doubled since 2003, the last time JP Morgan conducted the study. The key driver is usually diversification. In the case of French institutional investors, an initially high allocation to fixed-income explains why their higher return expectations is the primary motivation in investing in alternatives, says Karin Franceries, Head of Client Solutions at JP Morgan Asset Management. Overall, levels of investment in real estate and private equity remained broadly unchanged. One exception is the Nordic region where allocations to private equity have increased significantly. "In the Nordic countries, you have large and highly sophisticated investors with less regulatory constraints than in France, Italy and Spain. There has been a regulatory push to diversify away from risk and reduce portfolio volatility through investments such as private equity," says Franceries. Italians and hedge funds Italy recorded the largest percentage of institutional investors with the highest hedge fund return expectations (13.4% compared to 8% in Europe). On average, Italian investors also expected private equity returns of 19.7% versus 12.2% for Europe. "They are less risk averse, looking at cash plus 10% and they are the only ones who are significantly concerned with the level of volatility of hedge funds." The picture is starkly different in the UK, where the lowest proportion of respondents invested in hedge funds (23% vs. 42%), according to the report. "Given high equity allocations of UK pension funds, alternative investments are needed to stabilise returns through diversification." In general, respondents have a higher conviction in their views about alternatives than in 2003. However, a polarisation has taken place between alternative investors and non-investors, notes Franceries. Those who have already invested are keen to increase their allocations significantly, while the majority of institutions that have not invested appear to have little interest in doing so. In the next two to four years, the respondents plan to invest €103.6bn in alternatives, the largest flows going into real estate (€27.2bn), followed by hedge funds (€17.1bn), private equity (€16.3bn), infrastructure (€14.5bn) and the balance in other asset classes, including commodities and currencies. Real estate, considered a core asset, received the highest marks in Germany and Austria where 69% of respondents intend to increase exposure in the medium-term. While the survey was conducted before the credit crisis, future return expectations for real estate remain realistic, says Franceries. They have moved from 15% to 8%. JP Morgan Asset Management interviewed 282 institutional investors in 12 European countries with €1.9tr in assets to complete the survey. The biggest increase of respondents investing in alternatives took place in Belgium and the Netherlands. The region also had the highest allocation to real estate at 9.1%. Germany and Austria (€352bn) were the two countries where investors projected the biggest increase in real estate from 8% to 11%. VB |
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