EUROPEAN ASSET ALLOCATION SURVEY SURVEY 2015

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1 HEALTH WEALTH CAREER EUROPEAN ASSET ALLOCATION SURVEY SURVEY 2015 EXECUTIVE SUMMARY

2 WELCOME Our 2015 European Asset Allocation Survey gathered information on nearly 1,100 institutional investors across 14 countries, with total assets of more than 950 billion. In this executive summary, we provide highlights of our key findings. The full document, which provides a comprehensive overview of investment strategy trends across the European pension industry, is available at After 2014 surprised investors with a dramatic fall in long-dated bond yields and a halving of the oil price, 2015 has already provided investors with plenty of food for thought. The combination of low and even negative yields across a number of eurozone bond markets, modest risk premia, and rising volatility creates a challenging environment. With relatively few attractively priced assets available, we believe that investors need to challenge existing beliefs and processes, introduce exposure to less-familiar return drivers, and consider less-constrained mandates in order to meet their objectives. As our key findings show, there is some evidence that such shifts are already in train. KEY FINDINGS 01 PENSION SCHEME DE-RISKING REMAINS A DOMINANT TREND IN MATURE MARKETS Within most countries in the survey, average equity allocations increased last year. In certain cases this was significant - such as the eight percentage point increase for German Contractual Trust Arrangements - but on the whole it was marginal. Offsetting this, however, was the ongoing de-risking of defined benefit pension plans, particularly in the UK and Ireland, which leaves a visible footprint in our survey data. Across Europe as a whole, average plan equity weightings fell by two percentage points (from 34% to 32%). By and large this overall strategic reduction in equities is expected to continue. Broad Strategic Asset Allocation by Country 100% 80% 60% Other Property Bonds Equities 40% 20% 0% Belgium Sweden Germany (CTA) Ireland Spain United Kingdom France Switzerland Netherlands Denmark Norway Finland Italy Portugal Germany Average 1

3 Percentage of Plans Expecting to Change Investment Strategy Domestic equity -24% 1% Non-domestic equity -17% 8% Domestic fixed interest government bonds interest -11% 24% Domestic index-linked government bonds -6% 33% Non-domestic government bonds -6% 6% Domestic corporate bonds -9% 27% Non-domestic corporate bonds -4% 13% Other matching assets -1% 50% Property -7% 15% Alternatives -2% 5% Decrease exposure Increase exposure In the UK specifically, de-risking frameworks are now in widespread use by DB plans, alongside other risk management approaches such as interest rate hedging and liability management programmes. With around a third of plans finding themselves cash-flow negative, and this proportion expected to rise to over a half within five years, it may be that asset strategies become increasingly cash-flow driven over time. Changes in Broad Strategic Asset Allocation for UK Plans ( ) 100% 80% Other Bonds Equities 60% 40% 20% 0%

4 02 LOW (OR NEGATIVE) YIELD ENVIRONMENT SHIFTS ATTENTION TO ALTERNATIVES For less-constrained investors, such as endowments and foundations, there are some signs that, in response to low bond yields, there has been a small switch from bonds into equities. However, at an aggregate level, we find little evidence of the great rotation (from bonds to equities) that had been predicted by many commentators. Instead, investor appetite has shifted towards alternatives, with a two percentage point increase in the average allocation (from 12% to 14% of plan assets) at the overall European level. Growth-oriented fixed income strategies, such as multi-asset credit and private debt, saw the most significant increase in demand over the year. Change Since 2014 Private equity 8% 10% Growth-orientated fixed income 27% 40% Real assets 41% 48% Hedge funds Multi-asset 17% 18% 26% 27% Percentage plans with an allocation (2014) Percentage plans with an allocation (2015) 3

5 03 ALPHA BUDGETS BEING REDEPLOYED The use of passive management within traditional equity and bond portfolios has increased since 2014 (from 45% to 49% in equities and from 37% to 44% in bonds). Meanwhile, average performance targets for alternative allocations, as well as the size of those allocations, have risen. This suggests that investors increasingly prefer to seek returns from manager skill (or alpha ) within alternatives mandates, while harvesting cheap beta in the core equity and bond portfolios. It is worth noting, however, that many of the largest investors continue to make significant use of active management across their entire portfolios, reflecting the generally greater governance budgets available to such investors. Average Active Manager Outperformance Targets by Plan Size > 2.5bn 1bn- 2.5bn 500m- 1bn 250m- 500m 100m- 250m 50m- 100m < 50m 2.6% 1.5% 2.4% 1.6% 1.8% 1.2% 1.8% 1.1% 2.2% 1.1% 1.8% 1.0% 2.3% 1.1% 0.7% 2.7% 3.7% 4.0% 3.5% 3.2% 3.4% Equity Bond Other Proportion of Equity and Bond Assets Managed on a Passive Basis > 2.5bn 1bn- 2.5bn 17% 23% 28% 40% Equity Bond 500m- 1bn 38% 47% 250m- 500m 42% 55% 100m- 250m 46% 49% 50m- 100m 48% 50% < 50m 55% 66% 4

6 04 INCREASING COMPLEXITY CONTINUES TO AFFECT GOVERNANCE STRUCTURES A consistent theme emerging from this survey in recent years relates to investors response to the increasing complexity of the investment landscape. We find that larger plans with greater resources are likely to make use of internal committees as a means of managing their investments, where as smaller investors have increasingly chosen to delegate some aspects of the investment decision-making process to a fiduciary manager. Responsibility of Day-to-day Investment Issues by Plan Size < 50m 50m- 100m 100m- 250m 250m- 500m Third party Investment sub-committee Main board or trustee 500m- 1bn 1bn- 2.5bn > 2.5bn Average 5

7 05 SUSTAINABILITY AND STEWARDSHIP Our survey points to an increasing focus on environmental, social, and governance (ESG) factors within the investment process, with only 35% of respondents not actively considering these factors (versus 48% in 2014). Although this is partly a reflection of reputational risk, we note that this year such factors are more firmly recognised as also having material financial impacts. Stakeholders address ESG factors at different levels, but notably as part of manager selection and monitoring. In doing so they rely partly on advisers to understand how their managers, be they active or passive, incorporate ESG factors in their investment process. Key Drivers Behind the Consideration of ESG Risks Reputational risks Financial materiality of the risks 19% 19% Alignment with sponsor s corporate responsibility strategy 8% Individuals on the trustee board 10% FURTHER INFORMATION Further detail and comments on each of the findings outlined in this document can be found in the full survey document available at Nathan Baker Principal nathan.baker@mercer.com Phil Edwards European Director of Strategic Research phil.edwards@mercer.com 6

8 IMPORTANT NOTICES References to Mercer shall be construed to include Mercer LLC and/or its associated companies Mercer LLC. All rights reserved. Proprietary and Confidential This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer s prior written permission. Opinions Not Guarantees The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer s ratings do not constitute individualized investment advice. Not Investment Advice This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Information Obtained From Third Parties Information contained herein has been obtained from a range of third-party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party. For Mercer s conflicts of interest disclosures, contact your Mercer representative or see Should you have any questions about the survey, please contact Stella Beale at stella.beale@mercer.com. 7