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Equity investing set to grow in continental €urope

The appetite of continental European pension funds for global equities is set to grow dramatically over the next three years, according to new research carried out by Watson Wyatt. Pension fund respondents allocate some € 8.8 billion (8% of total out-sourced assets) to pure global equity mandates, including domestic equities but almost half of those who responded to the survey (47%) indicated that they would increase their allocation to this asset class in future.

The survey, which covers all European markets except the UK, illustrates the growing acceptance of equity investing amongst institutional investors and, in particular, their willingness to invest in foreign equities. For example, allocations to emerging markets are also set to grow significantly. Just over €8 billion is currently allocated to this area but 39% of respondents that already invest in emerging markets indicated that they intend pushing up their allocation still higher.

Unlike UK pension funds, which have studiously avoided this market over the last few years, the most popular out-sourced asset class amongst respondents was US equities. Pension fund respondents allocated some €18.2 billion to US equities (17% of total out-sourced assets) and 26% stated that they intend to increase their allocation over the next three years.

More out-sourcing

The survey also highlighted the increasing propensity amongst institutional investors to out-source their investment management arrangements to external specialists. In total, 196 corporate and public pension funds in nine countries across Europe were contacted. Of these, 154 had fully funded pension arrangements and 120 of these had decided to out-source some or all of their investment arrangements to external managers (37% of total respondent assets). In fact, pension funds in Switzerland, the Netherlands and Germany came top of the list in terms of using third-party organisations, awarding 260, 222 and 131 external mandates respectively.

In terms of European pension fund respondents’ total allocation to external mandates, almost 50% went into foreign equities, followed by pan-European equities (12%), euro equities (10%) and balanced (8%). The largest average mandate size was for foreign equities at €409 million. Unsurprisingly, the largest specialist mandates were out-sourced from the Netherlands and Switzerland.

Investment approach
by size of mandate%
	Active	Combination	Passive
Belgium	35%	0%	65%
Denmark	77%	0%	23%
Germany	97%	2%	1%
Ireland	97%	1%	2%
Netherlands	34%	54%	12%
Portugal	0%	100%	0%
Sweden	93%	0%	7%
Switzerland	75%	1%	24%
Europe	55%	21%	13%
by number of mandates%
	Active	Combination	Passive
Belgium	66%	24%	10%
Denmark	96%	0%	4%
France	67%	33%	0%
Germany	93%	15%	5%
Ireland	70%	2%	15%
Netherlands	56%	27%	17%
Portugal	0%	100%	0%
Sweden	81%	5%	14%
Switzerland	58%	4%	38%
Europe	73%	12%	15%

Active management preferred

Having made the decision to appoint an external manager, most European pension funds (55%) opt for an active manager, no doubt prompted by the widespread belief in Europe that active management can add value. Passive only management, meanwhile, was used by a mere 13% of pension funds, while a far greater amount (21%) chose a combination of active and passive approaches. Nevertheless, there are countries where the trend towards passive management has clearly accelerated, most notably in Belgium, Denmark, Ireland, Sweden and Switzerland. The Dutch prefer a bipartite approach involving active and passive management.

When it comes to selecting investment managers, the quality that most European pension funds look for is a clear and lucid investment philosophy. Mandate suitability and investment performance come next on their list of 'must haves'. Bottom of the list were fees and culture respectively, which will please any low profile manager currently trying to market an expensive equity product in continental Europe.

This article first appeared in IPE Magazine May 2000 and is reproduced with their permission

Average mandate size, € million
	Balanced	Domestic bonds	Foreign bonds	Domestic equities	Foreign equities
Belgium	84	27	5	24	13
Denmark	-	671	20	250	95
France	1	0	0	0	0
Germany	89	35	20	189	190
Ireland	108	-	0	0	85
Netherlands	301	0	618	207	790
Portugal	12	0	0	0	0
Sweden	14	0	1	0	0
Switzerland	52	338	58	174	115
Europe	81	306	248	184	409