Investment - Articles - Shift from beta to alpha evident in alternatives allocations

 The findings also show that the use of passive management of equity and bond holdings increased, suggesting that European investors increasingly prefer to seek returns from manager skill (or “alpha”) within alternative and unconstrained mandates, while harvesting cheap “beta” in core equity and bond portfolios.

  

 “After 2014 surprised investors with a dramatic fall in long-dated bond yields and a halving of the oil price, 2015 has already provided investors with plenty of food for thought,” said Phil Edwards, European Director of Strategic Research in Mercer's Investments business. “The combination of low and even negative yields across a number of Eurozone bond markets, modest risk premia, and rising volatility creates a challenging environment for return generation. To meet their objectives, investors will need to challenge their existing beliefs and processes and embrace less familiar asset classes and less constrained strategies. The key findings in our survey show some evidence that such a shift is already in train.”

  

 Mercer’s survey looks at the asset allocation of close to 1,100 European institutional portfolios across 14 countries, with total assets of more than €950 billion. With regard to alternative assets*, the findings show that the average allocation increased by 2 percentage points (from 12% to 14% of plan assets), a shift of around €30 billion based on the total assets surveyed. The shift for UK plans was even more marked, with a 6 percentage point reduction in equity allocations over the last two years being allocated almost entirely to alternatives portfolios.

  

 The survey also found a meaningful increase in the use of passive mandates for traditional, core, equity and bond assets. On the equity side, the average scheme now has 49% of their assets invested passively, up from 45% in 2014. On the bond side the use of passive management has increased from 37% to 44% of assets (for the average scheme).

  

 Mr Edwards said: “Our findings suggest that investors may be redeploying active management risk budgets towards alternatives portfolios. There is, however, a considerable variation in behaviour by plan size and governance budget, with larger investors exhibiting a greater use of active management across all parts of their portfolio alongside a tendency to invest via less constrained mandates.”

  

 Mercer’s survey also found an increased focus on environmental, social, and governance (ESG) factors within the investment process amongst participating funds. Only 35% of respondents reported not considering such factors in this year’s survey compared to nearly half (48%) in 2014. Key drivers behind the focus on ESG factors were cited as the potential financial impact as well as management of reputational risk. “Stakeholders are addressing ESG factors at many different levels — but notably as part of manager selection and monitoring — and increasingly rely on their advisers to understand the extent to which their managers, be they active or passive, incorporate ESG factors in their investment process,” said Mr Edwards.

  

 * Alternatives are classified as asset classes and strategies outside of traditional long-only equity, bond and cash mandates.