The Netherlands leads charge into government bonds

The Netherlands, an innovator in pension investment management, is leading a renaissance into government bonds at the expense of corporate bonds, as other European countries further reduce their domestic equities allocation, according to Mercer Investment Consulting’s 2010 European asset allocation survey.

The Netherlands has increased its domestic government bond allocation from 43 to 57 per cent from 2009 to 2010, while its domestic corporate bonds exposure has been reduced from 17 to 9 per cent. It has also allocated 2 per cent to non-domestic government bonds.

Overall the Netherlands dominates in its bond allocation, at a massive 70 per cent, trending upwards from 56 per cent in 2007.

Of the plans surveyed overall, a net 12 per cent indicated they would look to increase their exposure to government bonds, a significant reverse on the year before when a net 6 per cent said they were looking to reduce their exposure.

The reduction in domestic equities exposure continues particularly among UK pension funds which reduced their exposure to domestic equities from 54 per cent in 2009 to 50 per cent in 2010. This is down from a high of 68 per cent in 2003.

In Ireland it has reduced from 60 per cent to 59 per cent and in the Netherlands from 28 per cent to 23 per cent. This trend is likely to continue, with 29 per cent of UK schemes and 35 per cent of European schemes (ex-UK) planning further reductions in domestic equity. A further 20 per cent of UK schemes and 33 per cent of European schemes are planning a reduction in non-domestic equity.

The beneficiaries have been bonds, as a result of an investment strategy to reduce the volatility of the assets relative to the liabilities, and non-traditional investment opportunities, the result of diversification.

The survey highlighted a stark difference between the attitudes of plans in the UK and the rest of Europe when it comes to non-traditional investment opportunities.

Within the UK those that invested in hedge funds, allocated 13.2 per cent to the asset class, while in the rest of Europe that was 1.4 per cent.

Global tactical asset allocation was the most popular strategy for UK funds, while non-UK funds favoured hedge fund of funds.

The defined benefit survey, which looks at more than 1000 plans from 11 countries, with total assets of €500 billion ($682 billion), highlighted the sophistication of investment strategy as funds became bigger. Overall those funds with assets above $3.4 billion had 15 per cent allocated to domestic equities, 23 per cent to non domestic equities, 22 per cent to domestic bonds, 1 per cent to non-domestic government bonds, 12 per cent to domestic corporate bonds, 5 per cent to non-domestic corporate bonds, 7 per cent to domestic property, 1 per cent to non-domestic property, 5 per cent in cash and 9 per cent in other.

By way of contrast, those with less than $68 million allocated 25 per cent to domestic equities, 26 per cent to non-domestic equities, 28 per cent to domestic government bonds, 1 per cent to non-domestic government bonds, 15 per cent to corporate bonds, 2 per cent domestic property, 1 per cent in non-domestic property and 2 per cent in cash.