U.K., European Pension Trends
According to Pensions & Investments, an annual survey of 1,000 of Mercer’s clients representing in excess of €500 billion ($670 billion) indicates that despite performance, liquidity and fraud concerns highlighted by the recent global financial crisis, U.K. and European pension funds are looking to boost hedge fund-of-funds investments in 2010. The survey found that 13.6 percent of European pension funds are expected to increase allocations to hedge funds of funds– more than any other alternative asset class. This is of note because European pension funds have historically invested in single-strategy hedge funds and now appear to intend to invest in fund of funds as a means of diversification.
However, despite the move towards fund of funds investments, investors are very concerned with transparency and the time spent on due diligence has increased, perhaps due to the fact that there is a trend towards looking at prospective fund-of-funds portfolios one hedge fund at a time so that investors understand underlying investments.
According to Pensions and Investments,
Defined benefit plans in the U.K. and Europe plan to boost other alternative investments in 2010, too. Nearly 9% of European plans will increase allocations to emerging market debt, commodities and private equity funds of funds, while infrastructure, global tactical asset allocation and timber strategies also are expected to see increased allocations. Among U.K. pension funds, 6.2% plan increases to GTAA, 5.4% to emerging market debt and 3.8% to hedge funds.
The survey found that the long-term trend of pension funds allocating less money toward equities and more toward bonds. Pensions and Investments reports:
The average asset allocation in 2009 among U.K. plans was 51% equities, 41% bonds, 6% other and 2% real estate. That compares with 54% equities, 40% bonds, 4% other and 2% real estate in 2008.
For pension plans across the rest of Europe, the 2009 allocation was 50% bonds, 42% equities and 4% each real estate and other, vs. 48% bonds, 42% equities, 6% real estate and 4% other in 2008.
Other trends in pension fund investments of note include a move back to government debt due to the rising prices of corporate bonds that had been favored in 2009; opportunistic credit investments; growing prosperity in emerging markets; and investing in inflation-protecting assets (and not just inflation-linked government bonds) in the expectation that the removal of government stimulus packages in Western countries will drive up inflation in coming years.
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