Big Change in German Habits

January 17, 2010 by admin
Filed under: Business News

Institutional investors in Germany moved en masse in 2009 to express their disappointment at the failure of the asset managers they employed to deliver what they had promised. A recent survey by Ferri Euro Rating Services of 128 large institutional investors revealed that more than one in four fired an asset manager in 2009, a much higher proportion than has been seen before.
However, while this figure is spectacular, it doesn’t tell the whole story about the current fundamental change in institutional asset management. The survey also indicated that European equity mandates, a cruicial pillar of a German institutional investor’s strategic asset allocation, accounted for half of the stated mandate cancellations. And when asked about their reactions to the financial crisis, most investors reported an intention to overhaul their internal risk management processes and raised their allocation to bonds, even though, on average, they only hold a record low 6% in stocks already and are loaded with fixed income securities.
So what is the whole story? The evidence of the survey underscores what many investment professionals have observed throughout the past months, more and more German institutional investors are abandoning their traditional approach of investing for the long term. With up to 30% invested in corporate bonds and a record low equity exposure, often fully insured by derivatives, many investors have moved well away from their strategic asset allocations, which set out quotas for different asset classes to meet an investor’s long-term liabilities.
Instead short-term tactical considerations and the desire to act moe opportunistically and aggressively in the markets have won the upper hand in the decision-making process. Avoiding losses or even temporary writedowns on investments by year end has become the top priority as opposed to staying in line with the strategic asset allocation. As a result, few investors profited from the soaring stock markets in 2009. The majority are left with limited flexibility to invest in more risky assets that could potentially help rebuild reserves through higher returns.
This fundamental change of investment behavior has caused investors to turn their backs on traditional long-only mandates. They have started to invest large sums of money in absolute return mandates and dynamic portfolio insurance strategies. Both can typically engage in a wide range of asset classes and in instruments like swaps and derivatives, refrain from using indices as benchmarks and aim to limit losses without cutting the upside potential too much.
There is little doubt among asset managers such as Union Investment, Universal-Investment, DB Advisors, Lupus Alpha and Pioneer, that these so-called asymmetric returns, as opposed to the symmetric returns that long-only investing offers, will be the way for institutional investors to rebuild reserves and at some point in the future be able to invest according to their strategic asset allocation.

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