BOSTON NEWSLETTER: WHAT IS GOING ON IN EUROPE?

Boston newsletter: What is going on in Europe?

 

This newsletter looks at what is currently going on in the institutional investor landscape in Europe, and how the investment environment impacts investors’ decisions. In an ever-changing environment, what are some of the headlines investors currently focus on, and where does that fit best with asset managers? The newsletter will highlight factors that were indicated as being important in most countries across Europe.

The current investment environment continues to have a significant influence on the way institutional investors across Continental Europe structure portfolios. The search for yield, regional and European regulatory changes, cost pressure as well as social pressure in terms of ESG all heavily influence investors’ investment strategy, of course with differences across regions and investor types. The figure below shows the regional differences in Continental Europe and the level of impact from external factors.

 

 

Below are the two factors that were indicated the most important in a broad perspective across Europe. Previous newsletters have elaborated on ESG and its importance for investors in Europe. As shown above this is of the highest importance in Benelux, France, the Nordic region and Switzerland, but of less importance in Germany, Iberia, and Italy.

 

Regulation

European investors face multiple regulatory constraints in terms of solvency requirements, allocation limits, etc., and an increasing number of regulatory initiatives with a broad European reach being implemented. The implementation of Solvency II in January 2016 has had far-reaching consequences for insurance companies, but the majority of investors were well-prepared for the new framework. The leading investors had aligned the portfolio leading up to the implementation, and for some investors Solvency II created opportunities as old and regional strict regulatory limits were lifted. From an operational point of view, pillar I and II were relatively easily implemented, yet the reporting and disclosure requirements have taken their toll on many investors. For many traditional investors, this has led to less time spent on new investment decisions.

 

Search for yield

The search for yield continues to be the main factor affecting the trends in institutional investing in Europe. The low yielding environment causes great concern for investors across Europe. The responses to the search for yield differ much from region to region, typically dependent on the size of the investor. The large institutions in the Benelux and the Nordics have been very proactive in terms of searching for yield. This relates to squeezing out the last basis points of existing asset types, as well as implementing new asset classes and optimising returns after fees. The more traditional investors will often focus on fulfilling relatively low guarantees and will keep a tight rein on investments in new and less transparent structures.

 

Impact on mandates

The leading investors are increasingly searching for yield in illiquid and unlisted asset classes. This is reflected by a continued high search activity and more interest in private investments, predominantly private debt and equity. Traditional investors will look for more liquid solutions in their search for yield via movements out of the credit curve, not least towards emerging market debt or high yield.

Traditional investors, particularly in Southern Europe, continue to globalise portfolios, which has led to an increasingly positive attitude towards developed markets outside their home market as well as a greater interest in emerging markets.

The interest in risk premia continues to rise influenced by cost considerations, the search for yield as well as geopolitical shocks in 2016, which have increased investors’ awareness of downscaling their market risk. In particular, we see increased interest in multi-asset, multi-factor risk premia both in long only and long/short format.

Asset managers that are able to tailor strategies and products to the needs of the European investors and the current landscape the best will have an advantage when approaching investors. Within each region and country, investors will still deviate, and it is of the utmost importance for asset managers to fully understand the specific institutional investors’ demands and needs when approaching potential clients to have the highest likelihood of success.

 

Our findings in the European market are based on our published European Intelligence, which describes the competitive landscape in detail and further elaborates on impacts on European investors’ portfolios in detail. Should you have further interest in the European market please do not hesitate to contact Henrik Hoffmann-Fischer (h.hoffmann-fischer@kirstein.as) or Simon Sparre (s.sparre@kirstein.as) in our Danish office or Martin S. Nielsen (m.nielsen@kirstein.as) in our Boston office.

 

About Kirstein A/S

Kirstein A/S is a consultancy that advises professional investors and asset managers about investments and strategy. We are independent and never compromise our principle of independence. After more than 20 years in the market, we have consolidated ourselves as the leading financial consultant in Denmark and have also achieved a significant position abroad. We offer a high level of analytical expertise, flexibility and targeted solutions for our clients, who are mainly asset managers, pension funds, banks and institutional investors.

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