Investors prefer bonds

ALTHOUGH European institutional investors are recognising the fragile green shoots of recovery, fixed income remains their safe haven of choice, according to the annual European Institutional Asset Management Survey conducted by IPE and Invesco, which was published earlier this month.

Unsurprisingly, asset allocators across Europe slashed their equity exposure in 2008 and 2009 and retreated to the relative safety of fixed income. Even in Britain and the Nordic countries, where “the cult of the equity” prevails, equity holdings showed a sharp fall between 2007 and 2009.

For example, UK institutional investors had 56 per cent of their assets allocated to equities in 2007. This dropped to 46 per cent in 2008 and then to 44 per cent in 2009.

In countries such as Germany, France and Italy, where equity exposure has never been particularly popular, investors had less than 20 per cent allocated to the stock market last year.

Across the continent as a whole, equities have recovered from the four-year low of 25 per cent asset allocation recorded in 2008 to 29 per cent last year, reflecting both the rebound in markets plus any fresh allocations made.

So is European institutional investors’ love of fixed income here to stay? The IPE/Invesco survey seems to thinks so: “With the level of risk in portfolios still being of such concern, it is hard to see that any dramatic move will be made away from fixed income for some time.”

However, confidence in equities is starting to grow. A net 13 per cent of respondents to the IPE survey plan to increase their exposure to equities whereas only a net 6 per cent plan to raise their allocation to fixed income.

Baring Asset Management is certainly upbeat about the outlook for equities. Its head of asset allocation, Percival Stanion, says: “Barings has maintained a positive stance on equities as markets look as if they have established themselves at the bottom of a trading range and markets could rally from here as valuations look cheap compared to bonds.”

Barings has also just downgraded US government bonds after the recent flight to safety. EPFR Global’s flow data shows that the recent spark of risk appetite snapped US bond funds’ 17-month inflow streak. And with regards to European bonds, Barings believes that Italian bonds look like a good risk return arbitrage.

But investors had their fingers burned during the financial crisis. While uncertainty dominates the market, it will take a long time for institutional asset allocators to regain their confidence in the equity markets.