Additionally, European investors are looking for firms that offer excellent client servicing, understand the particular goals and needs of the client, with risk control and performance continuing to be key criteria as they struggle to maintain positive returns in lights of a prolonged bear market. The general shift in servicing correlates with an overall shift in investment horizon, which apparently have been lengthened, according to the fourth annual INVESCO European Institutional Asset Management Survey.
This may be due to the fact that institutional investors are recognizing the decline in their portfolios. During the year 2003, 28% of the institutional investors believed their assets under management had decreased, compared to 18% in 2002. For the Benelux and the United Kingdom, where nearly all the respondents are pension funds, this figure reached 80%.
“The market is changing and institutions, in turn, are changing their demands. Investment managers will have to respond to those changing demands in order to succeed,” explained Jean-Baptiste de Franssu, Chief Executive Officer of INVESCO in Continental Europe, in a statement.
Despite three years of generally negative returns in equities, institutions have been slow to modify their asset allocations. Overall, the equity weight in the institutions’ asset allocations decreasing only slightly – to 24% from 26%; very similar numbers to real estate and alternative asset classes, which declined to 9% from 10% in 2002. The little that was taken out of these two classes shifted to fixed income offerings, which rose to 54% from 49%, and cash, up to 13% from 12% just one year earlier.
The large positions taken in bonds also corresponds with the continuous search for yield: Planned asset allocation changes in 2003 indicate a preference for investment grade corporates followed by high yield corporates and emerging market bonds. Thus, with the more diversified portfolio, investors are looking for more specialized expertise. The shift towards “new” asset classes and “new” investment styles has necessitated the hiring of more specialized asset managers. Typical examples are corporate and high yield bonds and the increased interest in enhanced index equity management.
Overall, 85% of institutional investors say they use external managers, compared to 62% in 2002, with 20% saying they had increased the amount they delegate to external managers and 23% saying they will in the coming year. Further, three out of 10 are using more than five managers, compared to 25% in 2002 and just 21% in 2000.
Also, the number of institutions that have recently broken a relationship with an asset manager has decreased for the first time in 2003, with only 34% having reported a broken relationship with their asset manager in 2003. Unsatisfactory performance is the most important reason why these relationships have been broken.
The survey was undertaken by INVESCO in the Benelux region, France, Germany, Italy and, for the first time, the UK. It examines the attitudes of institutional investors to external fund managers, their level of use of external managers, as well as what they use them for, how they work together and what their expectations of external managers are.