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European institutional investors moving from government bonds to alternative strategies

UK and European institutional investors will continue to move away from government bonds towards riskier asset classes over the next five years, according to a Europe-wide study commissioned by alternative investment manager Aquila Capital.

The single most popular asset class in the current portfolio structure of institutional investors is government bonds, with an average of 21.2 per cent invested in sovereign assets.

In previous years, investors have increased their presence in government bond markets, however following the financial crisis investors have decreased their exposure.

According to the survey, this trend is set to continue with 19.6 per cent of institutional investors across Europe set to decrease the portfolio allocation of government bonds over the next five years.

This could be a reflection of the view that 53.7 per cent of the 255 institutional investors, from Scandinavia, Switzerland, Germany, Spain, France, Italy, Netherlands and the UK, do not believe that the Euro will exist in its current form in 2015. UK investors are the most sceptical to the continuation of the Euro in its current form, whereas investors in mainland Europe, in particular France and Italy, believe the Euro will still exist as it stands today. Eight per cent of UK institutional investors believe the Euro will still exist in its current form in comparison to 72 per cent in Italy, 60 per cent in France and 40 per cent in Germany.

The survey found that attitudes to government bonds have changed, with 49.4 per cent of European institutional investors believing sovereign issues will deliver negative returns. Looking at a cross section of government bonds, the survey shows that investors have most confidence in Scandinavian bonds with a circa 65 per cent approval rating of Norwegian and Swedish government bonds. German government bonds are rated in third place with 59.6 per cent of investors surveyed indicating they would consider investing. A majority of institutional investors indicated they would not invest in government bonds related to Greece, Portugal, Italy, Ireland and the survey also revealed low approval ratings for Japan. The survey also revealed that only 37.3 per cent of institutional investors would consider investing in UK government bonds.

Roland Schulz, managing director at Aquila Capital, says: “Institutional investors are operating in an increasingly complex environment where investment risk profiles are continuously changing and we are seeing this reflected in their investment decisions. We are still seeing a high share of bonds, both corporate and government, in portfolios which underscores the low risk profile of investors. However with the changing risk profile of bond investments, investors are increasingly moving towards alternative investments in particular real assets, equities and absolute return.”

In an effort to diversify away from a reliance on bonds, the survey shows that institutional investors are likely to increase the portfolio allocation of other assets classes. Investors are particularly encouraged by equities and real assets with 62 per cent and 41.2 per cent of investors believing that the respective asset classes will deliver positive returns in the next five years.

Evaluating the current portfolio structure, an average of 7.8 per cent of European institutional investors have exposure to real assets. However, UK institutions are leading the way in real assets with an average of 32 per cent invested in real assets. While UK investors are set to maintain their exposure to real assets, 18.8 per cent of wider European investors are likely to increase their holding. An increase of these riskier assets is set to be balanced with 33.7 per cent of investors increasing their portfolio share of corporate bonds, with 45.5 per cent of investors believing in positive returns in the near future.

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