Inflation fears for European funds

European pension funds are increasingly worried about inflation and are taking action to diversify their investments to include a range of inflation-linked debt and are looking to emerging markets, a new survey reveals.

Investment consultant Mercer released its annual European Asset Allocation Survey of 1,100 European pension funds with assets totalling €550 billion ($ 814.5 billion).

More than 80 per cent of those surveyed were concerned about inflation with 38 per cent of those taking immediate action to protect their assets.

This included increasing their allocation to inflation-linked bonds, allocating to inflation-sensitive assets and to inflation swaps.

Larger funds surveyed had increased their exposure to both domestic and non-domestic corporate bonds and had continued a steady reduction in equity allocations.

“It is of interest to note that that it is the very large plans that have reduced their strategic equity weight the most and, commensurately, that they have increased their exposure to domestic government bonds,” the survey notes.

European pension funds worth more than $3.7 billion held 31 per cent of their assets in domestic government bonds, 9 per cent in domestic equities, 18 per cent in non-domestic equities.

Their holdings of corporate bonds were split between domestic (11 per cent) and non-domestic (10 per cent).

ABout 20 per cent of all funds surveyed plan to increase their exposure to domestic government bonds and/or non-traditional asset classes.

Historically low bond yields have resulted in many funds surveyed indicating they want to diversify their bond exposure, says Mercer Investment Consulting partner, Crispin Lace.

They are looking to higher yielding alternative debt markets and emerging market debt.

European funds are looking to increase their strategic allocation to a wide range of non-traditional asset classes. On average 22 per cent of European funds intend to increase their allocation to emerging market debt, with 11 per cent of UK funds doing likewise.