Market volatility caused by the eurozone crisis is causing European pension funds to turn away from equities and increasingly invest in alternative asset classes, Mercer said today.
The consultancy's annual European Asset Allocation Survey, involving more than 1,200 pension funds in 13 countries with assets of over 650bn, found 50% of schemes now have assets allocated in alternative asset classes, compared to 40% a year earlier.
It said that the move away from equities had been most pronounced in 'traditionally equity-heavy' markets such as the UK and Ireland.
In the UK, average asset allocations to domestic and non-domestic equities fell by 4% over the past 12 months, from 47% to 43%, while Irish schemes' current average allocation to equities was 44% - down 6% from a year ago, and down over 20% since 2008.
Nick Sykes, European director of consulting within Mercer's investments business, said schemes faced the challenge of managing the risk market volatility posed to their portfolio at the same time as finding ways to generate returns to support future costs.
'In their quest to control volatility without sacrificing long-term returns investors have turned their attention to alternative asset classes,' he said.
'In addition to their relative attractiveness compared to low-yielding bonds, alternative asset classes also offer appealing diversification characteristics. Indeed, schemes are looking to asset classes that are less exposed to the sovereign debt crisis, with a particular focus on emerging markets, both for equities and bonds.'
He added: 'Investors are also looking globally for yield in bond markets, since the crisis has pushed core yields in Europe to very low levels. Liquid asset classes are also favoured, as investors value access to their assets in such turbulent times.'
Hedge funds, emerging markets debts and high yield bonds were the most popular alternative asset classes across Europe (excluding the UK) with almost 20% of schemes having an allocation to one or more of these areas. In the UK, diversified growth funds, macro hedge funds and funds of hedge funds were the most popular alternative classes.
However, Mercer stressed that, while allocations to alternative asset classes were on the increase, they were still relatively small compared to traditional asset classes such as assets and bonds. This year the total allocation to alternative asset classes reached an average of 8.5% for all surveyed schemes.
The next 12 months are expected to see schemes continue to move away from traditional classes, and equities in particular. Europe-wide, around 20% of schemes surveyed plan to reduce their domestic or overseas equity allocation.
At the same time, 27.2% of UK schemes - and 12.9% of European schemes - expect to increase their allocations to alternative asset classes.
The popularity of alternative asset classes is likely to persist over the next year and beyond with 27.2% of UK schemes and 12.9% of European schemes expecting to increase their allocations, Mercer added.
