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Europeans paying attention to diversification, risk hedging, climate change – survey

Institutional investors across Europe continue to seek diversification in asset allocation, are looking to hedge equity downside risk and are taking climate change into consideration more than ever, shows Mercer's latest survey.

The consultant's European Asset Allocation Survey 2018 surveyed 912 institutional investors across 12 countries in Europe, representing assets of around €1.1 trillion ($1.3 trillion).

It found that diversification continues to be in the cards for investors, with secured finance and private debt strategies benefiting from this trend in particular. The proportion of retirement plans allocating to secured finance strategies grew to 3% in this year's survey, up from close to zero exposure in the 2017 survey. Private debt allocations grew to 11% as of Dec. 31, vs. 7% a year earlier. "We expect both areas to see further interest in the years ahead," said a report of the survey.

A growing number of investors are also looking to hedge equity downside risk, with equity option strategies gaining popularity over the year. The survey found 9% of respondents have implemented equity-option protection strategies, while a further 24% of plans have considered taking this approach. Comparative figures were not available.

Climate change risk is also growing as a consideration among plans, with 17% of respondents considering the implications for their investments, compared to 5% last year. "Regulatory nudges have likely played a role here," with the report citing moves by the U.K. Pensions Regulator, the European Commission and the Financial Stability Board's Task Force on Climate-Related Financial Disclosure all encouraging investors to consider the physical and policy risks that are associated with climate change.

Regarding future asset allocation, plans on the whole expect to continue to reduce exposure to equities, with domestic government bonds, corporate bonds and other matching assets set to benefit from this move. The survey found 23% of investors expect to reduce their allocation to domestic equity, with just 1% planning to increase exposure. Non-domestic equity allocations are set to fall among 16% of investors and rise among 8%. Domestic inflation-linked government bond allocations are expected to rise among 31% of respondents and fall among 7%, while exposure to domestic fixed-interest government bonds is expected to rise by 28% of plans, but fall by 13% of investors. Domestic corporate bonds are set to rise among 20% of respondents and fall among 14%. Further, 13% of respondents expect their allocation to alternatives to fall vs. 6% expecting exposure to rise.

The report is available for download on Mercer's website.