Study: European, UK Equity to Fixed Income Flow Continues

January 23, 2005 ( - Originally spurred by the 2000-2001 European and US market collapse and now driven by new pension accounting rules, European institutional investors continue shifting out of equities into bonds.

A new Greenwich Associates report indicated that while fixed-income assets under management at institutions in continental Europe and the United Kingdom grew 23% from 2004 to 2005, fixed-income trading volumes grew only 3%.

Greenwich Associates research reveals significant increases in European institutional holdings of investment-grade credit bonds, asset-backed securities, and high-yield and emerging-market bonds. High-grade credit bond holdings increased nearly 50% over the past year, ABS and high-yield assets grew 30% and holdings of emerging-market bonds increased by a quarter, according to the Greenwich data.

Meanwhile, European institutions’ holdings of government bonds increased by 15%, while agency and covered bond assets increased 5% and 7%, respectively.

“These gains can be attributed in part to the migration of assets from equities to fixed-income that began with the collapse of European and US stock markets in 2000-2001 and has re-gained steam with the implementation of new pension accounting rules that discourage risk-taking among corporate plan sponsors,” said Greenwich Associates consultant Peter D’Amario in a new release, referring to new “mark-to-market” rules.

Greenwich Associates consultant Frank Feenstra added, “Based on our research in the European investment management industry, we would contend that the increased holdings of higher-yielding fixed-income products reflect the dilemma facing many European institutional investors: how do you increase investment returns in an environment that increasingly discourages risk-taking?”

Greenwich Associates research suggests that European fixed-income markets will continue to reap benefits from this asset migration in the months ahead. Among UK pension funds in particular, the number of investors planning to further reduce their equity holdings by 2007 tops the number expecting to add equities by a two-to-one ratio. For domestic fixed-income, the number of UK pensions planning to expand holdings is three to four times higher than the number planning cuts.