Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
Breadcrumb
  1. Home
  2. Print
May 31, 2010 01:00 AM

European crisis gives debt investors pause

Drew Carter
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The European sovereign debt crisis is causing institutional investors in Europe to rethink their exposures to eurozone government debt.

    Investors are dumping traditional government bond benchmarks and fleeing to German, French and Dutch bonds, corporate bonds and emerging market sovereign debt. Still others are simply reducing all eurozone exposure in their bond portfolios.

    “The dominant effect of the recent sovereign debt crisis is it is becoming less and less clear what a safe asset is,” said Michael Korn, Frankfurt-based managing director and head of institutional business development in Germany at Allianz Global Investors. “The perception of what credit risk is has changed drastically, and allocations are being adjusted accordingly.”

    Paul Kenny, Dublin-based senior investment consultant at Mercer LLC, said: “We are seeing a lot of concern from clients. ... Clients are talking about moving portfolios away from aggregate bond portfolios to those focused only on AAA-rated sovereign debt.”

    This is a strategic move rather than one that most Irish pension funds will look to do in the short term, he said, as transaction costs and losses from selling distressed assets in favor of soaring ones would be too high a hurdle. “That's going to be a blocker,” Mr. Kenny said.

    Officials at the 2.76 trillion Norwegian kroner ($422 billion) Government Pension Fund-Global, Oslo, are watching closely the 289 billion kroner the fund has invested in stocks — and 55 billion kroner in bonds — in Greece, Spain, Portugal and Italy, spokeswoman Siv Meisingseth told Pensions & Investments earlier this month. In 2009, the fund dumped some 77 billion kroner in government debt from those four countries.

    Dutch pension funds typically hold Greek and Italian inflation-linked sovereign debt in their liability-hedging portfolios. Some are selling Italian debt in favor of inflation-linked swaps backed by non-euro bonds as a way to “prevent further exposure to southern Europe,” said Jelle Beenen, Amstelveen-based partner and head of investment consulting in the Benelux region for Mercer. They are hanging onto the Greek bonds because prices have sunk, and a sale would lock in those losses, Mr. Beenen said.

    Dutch pension funds have been particularly hurt by the sovereign debt crisis as a byproduct of the European marketwide flight to quality, which drove down yields on Dutch government bonds, said Dennis van Ek, Amstelveen-based principal at Mercer. Lower bond yields increased liability values, which has hindered Dutch pension funds' progress out of deficit status, Mr. van Ek said.

    Meanwhile, German investors want to dump government bonds issued by the so-called peripheral nations of Greece, Spain, Portugal, Italy and Ireland for fear of possible ratings downgrades and defaults, experts say.

    The problem, however, is that bonds issued by these countries constitute about 40% of eurozone sovereign debt indexes; the loss of the five highest-yielding countries' debt leaves investors looking for returns and diversification elsewhere, experts say.

    Filling the gaps

    For some European investors, emerging market sovereign debt is stepping in to fill both diversification and returns gaps.

    “We're putting that forward to clients as a way to diversify their sovereign debt portfolios,” said Edouard Stucki, senior investment consultant at Towers Watson & Co. in Zurich. “Trusting government bonds are safe is a belief that will have to be amended.”

    DB Advisors is also recommending clients look to emerging market sovereign debt as part of a strategic shift to diversify away from euro debt. “People shouldn't be afraid that the (high-quality sovereign debt) playing field is shrinking,” said Georg Schuh, chief investment officer at DB Advisors, Frankfurt. “There are so many new markets opening up — you just have to have courage.”

    European money managers and pension fund officials consider developed-market sovereign debt to be riskier than that issued by emerging markets, according to a recent survey by Fitch Ratings.

    Among the 70 respondents, 70% said governments in developed markets face the greatest refinancing challenge over the next 12 months, while just 3% said the same for emerging market governments.

    Similarly, 74% expect credit conditions to deteriorate in the next year in developed markets, while 80% expect credit conditions in emerging markets to improve or stay the same. The survey was conducted in April, before a $1 trillion support package from the European Union and the International Monetary Fund was announced May 10.

    Anne-Laure Frischlander, Paris-based managing director at BNY Mellon Asset Management International Ltd., said French pension funds — which are run by insurance companies — are bound by guidelines that require them to invest in local-currency government bonds, typically French ones. However, European Union-wide regulations expected in 2013 could pave the way for replacing some euro-based debt with that of emerging markets in portfolios of French pension funds.

    “Emerging market debt is a big trend right now, especially that issued in local currency,” Ms. Frischlander said. “The fundamentals are quite good.”

    Veronique Cherret, director and head of institutional business at Aviva Investors in Paris, said she is having “more interesting discussions” about emerging market debt with insurance clients, too. “They are thinking about having a more strategic allocation to emerging market debt, but it would be quite limited.”

    Other investors are considering getting away from benchmark-based investing and moving into unconstrained approaches, managers said.

    “In the past, investors just picked any (standard) benchmark ... because they saw sovereign debt as just interest-rate risk and not credit risk,” said Frank Witt, Frankfurt-based executive vice president and head of business development for Germany and Austria at PIMCO Europe Ltd.

    Replacing

    He said German investors are replacing traditional benchmark-based mandates with gross domestic product-weighted ones, or with “absolute-return” ones, where the benchmark is an absolute figure over a cash rate, such as the London Interbank Offered Rate.

    “By moving to an absolute return-type benchmark, you address the issue of sovereign credit risk and you try to get away from a place where, if the market goes down, your portfolio goes down,” Mr. Witt said. He could not provide asset flows into absolute-return strategies for Germany, but said, “We have definitely seen significant flows” into the strategies.

    Rather than switching benchmarks, U.K. investors have “a greater interest in potentially limiting the influence of sovereign debt within global aggregate benchmarks by moving to (custom-made) fixed-weight composite benchmarks,” said Lloyd Raynor, senior consultant at Russell Investments Ltd., London. Russell is also recommending clients consider dividing their government bond portfolios equally between liability-hedging bonds, whose duration matches that of their liabilities, and global credit mandates.

    The question of dumping peripheral government debt presents an asymmetric career risk for European pension fund and corporate finance officials, AGI's Mr. Korn said: “If he loses performance because he's switching to the most conservative asset credit-wise, nobody will blame him. But if he sticks to the risky assets in the European periphery and something goes wrong, he has to take all the blame.”

    “Very few (corporate pension funds) are choosing to ride it out,” Mr. Korn said.

    Some money managers say the outlook for the entire eurozone is bleak, even as most European states — even Germany — have announced austerity packages to reduce budget deficits. “If these countries go gung-ho to sort out their problems with austerity packages, they could kill growth,” warned David Scammell, head of European interest-rate strategy at Schroder Investment Management Ltd., London. “If they don't grow, they're just chasing their tails.”

    Theo Zemek, global head of fixed income at AXA Investment Managers SA, Paris, said in an e-mail response to questions: “The problem for investors is that they cannot sit this out. About a third of the world's government bond markets are in disarray.”

    Related Articles
    Irish woes small part of firms' European fears
    Asset managers making plans in case of euro meltdown
    Recommended for You
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    Citadel's Ken Griffin gives $125 million to Chicago museum; name will change
    Multiple Tailwinds Propel Private Credit
    Sponsored Content: Multiple Tailwinds Propel Private Credit
    Sponsored
    White Papers
    2023 Hot Topics in Retirement and Financial Wellbeing
    Bonds: Shaken, but Not Stirred
    Today’s rate cycle and US equities in target date portfolios
    A Study of Allocations to Alternative Investments by Institutions and Financial…
    Unlocking Hidden Value in Japan
    The Art of the Possible in Data Automation for Institutional Investors
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars