Irish pension schemes have reduced their equity allocations by almost a third in the past three years, and diversified into fixed income and real assets such as property and infrastructure as new sources of returns, according to a new report by pensions expert Mercer.
Mercer’s 2020 European Asset allocation, published on Monday, shows average equity allocations for Irish defined benefit (DB) schemes fell to 27 per cent this year, compared to 39 per cent in 2017.
Allocations to fixed income investments like corporate bonds over the same period have risen from 48 per cent to 50 per cent, while the allocation to alternative assets like property, private equity and infrastructure has doubled to 22 per cent from 11 per cent.
The changes come as equities continue to perform strongly while bonds are delivering historically low – and even negative – yields.
The 18th edition of the report surveyed 927 institutional investor clients across 12 countries, reflecting total assets of about €1.1 trillion, including more than €20 billion invested by Irish pension funds.
The trend of reduced equity allocations is reflected more widely by investors across Europe and Britain, with the average equity holding falling to 22 per cent this year from 25 per cent in 2019.
Instead, investors have increased allocations in 2020 to growth-oriented fixed income (+10 per cent), private equity (+6 per cent) and real assets (+4 per cent) compared to 2019, “in an attempt to diversify schemes and deliver greater returns”, according to Mercer.
Another notable trend is the reduction in the number of investors across Europe reporting an allocation to hedge funds.
“Over the last decade, hedge funds have tended to fall out of favour, as they have struggled to justify their relatively high fees, investment complexity and lower liquidity,” said Mercer. “Increasingly, investors are looking for other routes to access non-traditional asset classes.”
In the Republic, exposure to hedge funds is now at 2.1 per cent compared to 1.3 per cent three years ago.
An uncertain 2020
Mercer (Ireland) head of investment consulting Olivier Santamaria said it was a volatile period for markets.
“With investors facing high levels of uncertainty for the rest of 2020 and pending the outcome of the tug of war between poor economic fundamentals on the one hand and financial markets expectations of a strong recovery on the other, risk management remains a key priority,” he said.
“We expect schemes to continue focusing on building more robust portfolios through increased diversification and better matching of the liabilities.
“In periods of high volatility, some investors may be ready to be more opportunistic as market dislocations often present an attractive entry point for those prepared to ride out short-term volatility.”
Mercer collected the data from its institutional client base during the final quarter of 2019 and early in the first quarter of 2020. The impact of Covid-19 impact has therefore not influenced the data collected.
Mercer said it did not believe asset data will have changed drastically due to market uncertainty, however, “as investors are seen to be continuing with the same long-term strategic decisions”.
