Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
Institutional investors are demonstrating a greater appetite for fixed-income investments. This July, defined contribution plans saw a $449 million shift to fixed income from equities, according to Hewitt Associatesâ€™ 401(k) monthly index. These moves are the latest in a continuing trend of increasing domestic fixed-income holdings and decreasing domestic equities holdings. In Europe, the trend was most evident in the United Kingdom, where equity allocations fell to 50% in 2010 from 54% in 2009, Mercerâ€™s annual European Asset Allocation Survey found. Several factors â€” including fallout from the recent financial turmoil and an increased use of strategies favoring bonds, such as liability driven investing â€” are behind this developing trend. Whether this is a long-term shift in institutional thinking or a short-term tactical asset reallocation remains to be seen. Still, the renewed interest in fixed-income investments, and its potential impact on global markets, means this asset class bears watching for the foreseeable future.
According to Pensions & Investmentsâ€™ annual survey of the largest retirement plans, the asset shifts from domestic stock to domestic fixed income within defined benefit plans were most visible when broken out by type of sponsor â€” union, public or corporate. The most dramatic changes appeared among union plans.
Mercerâ€™s survey also found that exposure to equities across other European markets remains low, typically lying within the 20% to 40% range. Germany is one notable exception, where the much lower level of equity exposure reflects local restrictions on the equity content of German pensionskassen.
In 2009, U.S. fixed income, global fixed income and emerging market fixed income all saw an increase in net asset flows, while U.S. equity, global equity and EAFE equity saw substantial decreases.
Although the markets have been recovering, the trend away from equities continued into 2010 in Europe, Mercerâ€™s annual European Asset Allocation Survey found. The survey, released in April, found that the trend was particularly evident in the more mature defined benefit markets: