Plan executives shift to global allocations to cut concentration risk
Retirement plans across Europe are working to minimize the effects of portfolios that fund executives believe are too focused on domestic markets.
Increasingly, industry sources said, these diversification efforts mean exchanging local allocations for global mandates, which now feature prominently in requests for proposals encountered by money managers.
European DC plan investors have found that even pan-European equity portfolios focused on domestic stocks are less efficient than a global equity allocation because of concentration risk.
Exact numbers are hard to come by, but managers and plan executives say the anecdotal evidence is clear.
"U.K. clients were not comfortable with dealing with currency hedging exposure but have realized that domestic bias means that their portfolios aren't as efficient and return less," said Alistair Byrne, head of Europe, the Middle East and Africa pension and retirement strategy at State Street Global Advisors in London.
Lee Sullivan, group pensions manager at BNP Paribas in London, noted that "before changing the allocation a few years ago, we had 30% of equity in global mandates compared to 70% in U.K. equity." Now, BNP Paribas' £1.1 billion ($1.4 billion) defined contribution plan has about £700 million invested in global equity through BlackRock (BLK) Investment Managers, Schroders PLC and Nordea Asset Management.
"I agree, we have noticed more plans moved away from domestic stock," Mr. Sullivan said.
In continental Europe, too, DC plan investors increasingly are seeking global, rather than domestic or eurozone, equity strategies.
Christophe Granjon, deputy head of employee savings and retirement funds at Amundi in Paris, said in a telephone interview that "global equity mandates are on the rise among plan sponsors in France, Netherlands, Italy, Germany and Portugal."
According to data by the U.K.'s Investment Association, the trade group for money managers, global mandates managed by U.K. money managers have been increasing over the past few years and now constitute the largest type of allocation in their investors' equity portfolios at 50%. The association could not specify the percentage of mandates from U.K. or European DC clients. These mandates surpassed assets from separate U.K. and eurozone equity accounts, which have been decreasing since 2011, IA data show. U.K. money managers ran £3.1 trillion ($4 trillion) in assets on behalf of European investors as of December 2017.
While a few years ago, SSGA's U.K. defined contribution plan clients would have had an equity portfolio that was about 40% global and 60% domestic equity, today the global allocation would be 70% or higher, Mr. Byrne said.
Christian Lemaire, global head of retirement solutions at Amundi in Paris, concurred. "In France, almost all of the requests for proposals we are seeing are for overseas equities and not many mandates (are asking for) French equities or euro equities," Mr. Lemaire said.
"In France, a typical lifecycle strategy would hold around 30% of global equity two or three years ago, while now we are seeing allocations at around 40%."
Paul Todd, director of investment development and delivery at the £3.8 billion National Employment Savings Trust, London, said: "In terms of geographical breakdown of equities — we are wary of home bias, so we ensure our participants' equity risk is globally diversified. Our two developed market equity funds (£1.7 billion) managed by UBS track the FTSE World index. Currently around 17% of our equities are invested in European stock, excluding the U.K., and just 5% is invested in the U.K."
Paul Venables, finance director at recruitment firm Hays PLC in London, who is responsible for the firm's £200 million defined contribution plan, said having exposure primarily focusing on domestic equity "is quite a backward approach."
"For our defined contribution plan, we're investing via a global index fund. And the investment strategy is managed by Mercer," Mr. Venables said.
Changes in market conditions have played a role in overcoming behavioral biases associated with investing in domestic markets, sources said.
Amundi's Mr. Granjon said plan executives are looking for diversification because the risk conditions have changed. "The expected relative risk of equity investment is closely comparable. You now get better expected return for the same level of risk by investing in U.S. equities compared to eurozone or French equities," he said.
Martijn Vos, managing director and partner at risk management consultancy Ortec Finance in Rotterdam, Netherlands, said: "There are sectors that are available to (DC plans) via global mandates, which are not available in their domestic markets. Technology stocks, including high-performance stocks like Apple or Google, are a good example of that. In Europe, financials dominate the market."
But increasing a portfolio's geographic variety means defined contribution plan executives have to become much more aware about the effects of currency risk.
Sources said one of the reasons DC plans maintained high home investment biases was the high cost of currency hedging. A separate currency hedging program was more expensive for many of these plans. With global mandates, however, these costs could be lower, with as much as 2.5% of the return preserved because the price is included in the fee, Mr. Vos said.