As Germany’s biggest master KVG, Universal-Investment can give an neutral view on trends among German institutional investors. Since the start of Universal-Investment’s investor statistics in January 2012, the funds allocated in special funds (German Spezialfonds) have been more or less continuously shifting from fixed income to equites. Given the current unattractive interest environment and the development of equities over the past years, this is hardly surprising.
Over the past two years, the percentage of equities in investor portfolios has continued to rise, but now appears to be stagnating around 32 percent (see figure 1). By and large, equities’ valuations have risen much more sharply in the same time span, for example the German lead index DAX by 10 percent between January and June this year.
The reason for this disparity lies in institutional investors reallocating the gains from equity investments while maintaining the original funds allocated in this asset class unchanged. These gains go primarily into alternative assets such as property, PE, loans etc., as well as US and emerging markets government bonds.
While equity percentages remained more or less stable within the portfolios over the last 24 months, fixed income has lost about 7 percent points over the same time span, going down from 49.4 to 42.3 percent. To put it in absolute figures: while the overall volume of assets analysed has risen by 30 percent since 2015, the funds allocated in fixed income have only risen by 14 percent – meaning that investors invest less in fixed income than in other asset classes when allocating new funds.
The exception confirming the rule are corporate bonds: their overall share has risen by 27 percent over the past two years, which is almost in keeping with the overall growth of invested funds.
Within the fixed income asset class the percentage of corporate bonds has risen from 30 to almost 34 percent over this time span. This contrasts with the percentage of government bonds which have lost almost 6 percent points from 29 percent in June 2015 to 23.5 percent in June 2017. German Bunds witnessed the most pronounced exit, from EUR 7.5bn in allocated capital at the end of 2011 to EUR 5.9bn at the end of June 2017. This is a huge decline considering that the overall volume of assets on Universal-Investment’s platform has doubled over the same period.
In relative figures this becomes even clearer, with German Bunds sinking from 7.7 percent of the allocated capital to below 2.5 percent. At an interest rate close to or even below zero these assets are less and less attractive to professional investors.
But government bonds do remain attractive for investors – it is the interest rate level that makes the difference. US government bonds for example have been on investors’ shopping lists for some time now, their value in the portfolios multiplied by the factor 7, from EUR 435mn at the end of 2011 to EUR 3.2bn by the end of June 2017, or from 0.45 to 1.37 percent.
The same accounts for emerging markets government bonds, see figure 3: from a level of slightly below EUR 1bn at the end of 2011 their proportion in the portfolios has grown by the factor three to more than EUR 3.5bn in June 2017. In terms of percentage this equals a rise from 1.1 to 1.53 percent.
The investment decision does not automatically focus on the usual (and large) suspects such as Poland or Brazil. While the bonds of these two countries doubled their volumes in investors’ portfolios over the last five and a half years they do not reach the growth levels of other government bonds that had been less favoured before. This includes Malaysia, jumping from EUR 17mn to 164mn – i.e. a roughly tenfold increase. Chilean bonds managed a 14-fold increase and Thai bonds rose by a whopping factor 18, from EUR 5mn to 89mn.
In absolute figures these are still small sums if compared to about EUR 6bn invested in German Bunds. However, a clear trend towards smaller and far less visible government bonds cannot be denied. This suggests that due to the sinking default risk of these issuers, investors view their returns more attractive as compared to bonds from Eurozone issuers.
In the larger picture however, positive developments in emerging markets bonds cannot outweigh the downward tendency in the fixed income asset class. Overall, government bonds have decreased their share by nearly half over the past five and a half years and are currently at 13.4 percent. Institutional investors are obviously turning to other asset classes that promise to meet their return requirements better.
Over the past years, institutional investors have increasingly turned to alternative investments in order to optimize their investments returns and risks structures. The current Universal-Investment statistics confirm this trend, see figure 4. Since the end of 2011 the invested capital in this asset class has grown by roughly the factor 8, i.e. from slightly below EUR 3bn to 23bn at the end of March 2017. About half of this is allocated in equity instruments such as private equity and 21 percent in loan capital such as private debt. Securitizations account for 26 percent, hedge funds for 3 percent.
Investors are more and more diversifying within the asset class. While initially the focus was on renewables, they have now moved on to infrastructure and private equity. At present private debt investments are coming into focus. As of March 2017, the capital invested in equity was at roughly EUR 12bn. This includes infrastructure (34 percent), private equity (29 percent) and private equity real estate (11 percent). By selecting objects with a good risk return ratio investors achieve a stable long term cash flow.
Where loan investments are concerned (EUR 4.6bn allocated as of Q1, 2017), corporate finance accounts for 57 percent, infrastructure loans for 21 percent and municipal loans for 7 percent. Further assets include ship financing at 7 percent and loans for renewables projects at 7 percent as well.
Likewise property investments on the Universal-Investment platform have risen from virtually zero to more than EUR 10bn. As in other areas as well, diversification is on the rise, including both geographies and sectors.
In spite of a currently robust European economy and recent positive developments of the Euro the risk of regional turbulences and geopolitical dangers is unmitigated and threatens with volatility. Tools like overlay management can reduce these risks to a certain extent and appear to have helped investors on the Universal-Investment platform weather the biggest storms over the last few years as evidenced by the performance statistic, see figure 5. Since the financial crisis ten years ago, investors have achieved an average performance of 3.8 percent. Not a bad result at all.
The analysis covers all assets in segregated mandates which were administrated by Universal-Investment over the period 01 January 2012 to 30 June 2017. The figures are updated monthly. The total volume of analysed assets is currently around EUR 234bn. This is 15 percent of the total EUR 1,554bn of assets held in segregated mandates in Germany at the end of May 2016, as published by the German investment association, Bundesverband Investment und Asset Management (BVI).
Author: Markus Neubauer and Katja Müller
Date of issue: 8/31/2017
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