European pension funds are reducing their equity allocations at the fastest pace since 2001 following the pop of the tech-stock bubble, as markets have slashed stock values. But don't expect pension funds to restore equities to their pre-crisis level.
Consultants, managers and pension fund executives agree that European pension funds will settle at a much lower equity allocation — unlike the last time, when allocations recovered to previous levels.
In the long term, the allocation to equity will probably settle around 40% (of the total portfolio) rather than around 60%,” said Paul Price, Dublin-based global head of institutional business at Pioneer Investments, which had $213.7 billion in assets under management globally at year-end 2008. “What might change that view in the short term is a rally — a sustained rally.”
Johan Magnusson, managing director of the 172 billion Swedish kronor ($19.6 billion) AP Fonden 1, Stockholm, added: “We've had two crashes in the equity market within the last eight years. Most investment portfolios have not been designed to account for that, so we have to try and understand whether this is a one-time event or do we need to rethink the whole idea” of allocating 50%-60% of the investment portfolio to long-only listed equity.
Earlier this month, AP1 officials announced a restructuring of the entire investment management team in order to concentrate on strategic asset allocation, focusing more on “overall risks such as the selection of asset classes, regions and sectors,” Mr. Magnusson said. While reallocation plans have not been finalized, AP1 will likely reduce publicly traded equity from about 60% in favor of private equity, which will increase to 5% from less than 1%. Real estate, which is currently about 5%, may expand to 8% of the entire portfolio, also at the expense of listed stocks.
“We're not doing this because we've lost money in the past year,” Mr. Magnusson said. “We're doing this because we believe that we have to have a long-term focus on absolute return (portfolio management) as opposed to relative return.”