GERMANY - German institutional investors, in their search for stable returns without increasing risk, are turning away from European fixed income to real estate, while faith in external managers and consultants remains low, according to a survey by Greenwich Associates.

In the first half of this year, the fixed income quota in German institutional portfolios fell from 68.7% in 2009 to 66.3%, the market research house concluded from a poll of nearly 230 large German institutions.

Looking at European fixed income, institutions cut back exposure from 65% to 60.2%, partly because of 'active diversification efforts', reflected in the quota for international bonds increasing from 3.7% to 6.1%, Greenwich said.

Rather than shifting these allocations to equity, however, institutions moved many of them to real estate, the company said.

The equity quota remained relatively low in most portfolios, with an average level of 7.9% - up from 7.6% in 2009, but still well below the 2008 peak of 14.2%.

Corporate pension funds remained the German institutions with the second highest equity quota (18.1%) after corporate treasuries (33.7%). Surveyed public pension funds reported a 12.1% equity quota.

Overall, German pension funds lowered their return expectations on all asset classes except hedge funds, for which expectations were up almost to the pre-crisis level of more than 7%.

For fixed income, the future return is expected to be 3.9% over the next five years after 4.2% in 2009, while for European equities expectations were cut from 6.6% to 6.2%. 

Most polled institutions, despite being aware their current asset allocation would not yield the necessary returns over the medium to long term, indicated they would hold fire on major portfolio reconstructions until early next year.

While the amount of assets allocated by German institutions to external managers has recovered to pre-crisis levels, approximately 70% of assets are still being managed in-house, Greenwich said.

The most pronounced drop in the use of external managers was reported for European bonds, with only 53% using an external manager for the asset class after two-thirds having done so in 2009.

More institutions than last year - 28% in 2010 compared with 25% in 2009 - said they used consultants for investment advice.

However, according to Greenwich, this share remained "far lower" than the rate of consultant use found in most other European countries.