Institutional investors at risk of missing investment targets

• Hunger for institutional investment returns at highest level since the financial crisis
• Risk aversion on the decline
• Risk management given priority

Frankfurt, 20 October 2014: Institutional investors in Germany see hard times looming ahead. They expect that, on average, 43.5 per cent of their peers will fail to hit the investment targets they have set themselves for the coming year. Investors' traditionally strong preference for safety therefore continues to decline. At the same time, growing importance is being attached to investment returns. These were among the key findings of the latest risk management survey conducted by Union Investment.

The mood of pessimism is particularly pronounced among banks. Asset managers in this investor group expect 49 per cent of peers in their sector to miss their investment targets in the coming year. The lowest such target failure rate was the 37.8 per cent reported by corporate investors. Institutional investors see a risk that they will miss their return targets over the medium term as well. They reckon that, on average, 43.6 per cent of institutional investors will fail to achieve their investment objectives for 2018. "Investors are quite clearly of the view that low interest rates and the adverse investment climate are here to stay for the foreseeable future," comments Alexander Schindler, the member of Union Investment's Board of Managing Directors responsible for business with institutional clients. "The next few years will prove to be a truly testing time for many of them."

Pressure on returns is forcing investors to rethink

Investors' attitudes have already changed in response to the challenges posed by the low level of interest rates. When considering the three traditional key investment criteria of safety, liquidity and returns, investors are attaching growing importance to the last of these factors. 19 per cent of respondents in the latest survey cited the rate of return as their generally most significant investment criterion. This is the highest figure since the financial crisis. The corresponding figure for last year was only 8 per cent.

Although safety remains the paramount consideration in investment decisions, only 64 per cent of institutional investors now claim that it is the most important criterion. 79 per cent of respondents cited it as the main factor one year ago. Investors' risk aversion has also declined. Whereas the proportion of those describing their investment policies as safety-driven was as high as 84 per cent last year, this figure fell to 77 per cent in the latest survey. Alexander Schindler views this as a logical outcome: "The only way to generate higher returns is to take greater risks. The stronger pressure on returns has therefore inevitably increased the willingness to take carefully calculated risks," he explains.

Risk management expertise required

Although the risk appetite among German institutional investors has grown recently, loss avoidance continues to top their list of priorities. 80 per cent of them attach the highest importance to this criterion. Consequently, risk management is considered to be crucial. Risk management expertise is thus a key factor in the choice of asset manager: this was the view expressed by 82 per cent of respondents, compared with 79 per cent in 2013. "However, risk management should not be seen as a purely defensive tool," stresses Schindler. "Given the pressure on returns, investors are now more concerned than ever to achieve superior risk-controlled performance. Sound risk management therefore always involves managing opportunities as well."

Apart from possessing the ability to analyse and control risks across asset classes, asset managers should also demonstrate an in-depth understanding of local regulatory requirements. The reason: 84 per cent of institutional investors claim that legal risk is a key factor in their investment decisions. These investors attach the highest priority to compliance with the regulations set by the German Federal Financial Supervisory Authority (BaFin). 68 per cent of respondents consider this requirement to be especially important, followed by statutory compliance with investor-specific regulations (61 per cent) and compliance with further regulatory frameworks such as Solvency II and Basel III (47 per cent).

Information on this survey

This is now the tenth year that Union Investment has investigated the preferences and risk attitudes held by institutional investors such as insurance companies, pension funds, charitable foundations, banks and large corporations. A total of 109 institutional investors were polled between 14 April and 26 May for this year's study.

Contact at Union Investment:
Stefan Barkhausen
Tel. +49 69-2567-2660
stefan.barkhausen@union-investment.de