European institutional investors to lift allocations to alternative income assets

The amount of capital allocated to alternative income assets by institutional investors in Europe is expected to increase “significantly” according to new research by Aviva Investors.

The study revealed that investors in the UK and continental Europe are upgrading allocations to infrastructure debt and equity, structured finance, real estate finance and private corporate debt in a move to ”target stronger risk-adjusted returns and diversification”.

Aviva Investors said the research, which surveyed over 250 pension schemes and insurers in the UK and Europe, “showed UK pension funds are planning the largest increase in allocations to alternative income, bringing their exposure closer in line with insurers in the UK, and pension funds and insurers in Continental Europe.”

UK pension schemes plan to increase their allocation to alternative income assets by 51%, from 4.3% to 6.5%.

UK insurers are also expected to raise allocations by 14%, from 7.3% to 8.3%, the research revealed.

In continental Europe, Aviva Investors said insurers and pension funds are looking to increase allocations by over 40%.

“Continental European insurers plan to allocate 9.2% of their portfolio to alternative income assets, up from 6.5%, while pension funds plan to raise their allocation from 5.2% to 7.3%.”

The report said the expected increase in allocations is driven by the downside protection alternative assets can offer.

Mark Versey, the chief investment officer at Aviva Investors’ real assets arm, said: “The appeal of the alternative income sector has grown significantly among European pension schemes and insurers over the past decade.”

Versey said institutional investors have been lured by the illiquidity premium provided by private assets, as well as other benefits such as diversification and downside protection.

“As the era of quantitative easing finally winds down and interest rates rise, the survey highlights that investors are venturing into new sectors and geographies. This has also been borne out in our conversations with clients.”