Investors need strong nerves in 2024, but institutional investors are staying calm, according to the latest analysis at Universal Investment. In the equities segment, investors are even showing an appetite for risk, writes Martin Groos.
As one of Europe’s largest fund service platforms, Universal Investment has been tracking institutional assets since 2011. The latest analysis as of 30 June shows a total investment volume of 595 billion euro, an increase of almost 7 percent compared to around 557 billion at the end of June 2023.
Equities and bonds, traditionally the largest portfolio allocations, grew slightly year-on-year. Bonds accounted for 230 billion euros at the reporting date, corresponding to a ratio of 38.8 percent. Equities accounted for 148 billion euros, or around 25 percent.
Equities: targeted reallocation
Compared to a share of 23.4 percent in mid-2023, the equity allocation has increased slightly. In part, this is likely due to the performance of the markets, as can be seen from the curves of most of the major indices.
However, investors appear to have actively reinforced this effect by reallocating within the equity segment. This becomes clear by looking at investments in so-called sector funds – mainly technology.
This sector has rallied in the past twelve months, and the reallocation is likely to have further increased its share in the portfolios. In 2023, the tech sector accounted for just under 18 percent of the equity segment; by 2024, this figure had risen to 20.4 percent. The six most heavily weighted individual stocks, which together account for 6.6 percent of the equity segment alone, are Microsoft, Apple, Alphabet, Nvidia, Amazon and SAP.
Combined with the communication services sector, tech stocks account for more than a quarter of the equity allocation. Many investors appear to be consciously accepting a cluster risk in order to participate in the sector’s growth story.
Bonds: stable anchor
Compared to last year, bonds increased their portfolio share from 38 to 38.8 percent. In total, a good 230 billion euros were invested in bonds as at 30 June. The main fixed income categories are roughly equal: corporate bonds at 28.5 percent and government bonds at 27.7 percent. Within govies, German federal bonds were clearly in the lead with just over 30 percent at the end of 2023, followed by emerging market bonds (17 percent), US Treasuries (12 percent) and French OATs (11 percent).
Real estate: important pillar
Property investments on the platform have increased their share six-fold in the last ten years and now stand at 6.1 percent. The curve dipped in 2020, the year of the pandemic, but has now almost levelled out again.
There is strong geographical diversification within the segment. Germany remains the heavyweight with 16.3 billion euros, followed by North America with 9.9 billion euros and Europe (excluding Germany) with 9.2 billion euros. The Far East roughly doubled its volume: Asia from 2.7 to 5.3 billion euros and Australia from 0.6 to 1.2 billion.
Alternatives: steady growth
Alternative investments recorded a volume of 102.8 billion euros at the end of 2023, an increase of 11 percent compared to the previous year’s figure of 92.3 billion euros. By the end of the first quarter of 2024, the volume had risen to 105.3 billion euros, continuing the trend.
Within the segment, equity structures accounted for 69 billion euros at the end of the first quarter, debt structures 13 billion, hedge funds 12 billion and securitisations just under 10 billion euros. In total, the segment completes more than 975 transactions per year.
The steady growth of the alternatives segment reflects the importance investors attach to diversification. They also benefit from increasing professionalization: The data available on individual investments is becoming more comprehensive and reliable, and new companies on the market are offering innovative solutions to specific problems. Comparability and transparency are further driving the market.
Performance: new optimism
With the turnaround in interest rates, central banks around the world have ended a historically exceptional situation. For most institutional investors, meeting their return targets has finally become a realistic goal again.
The overall performance of all portfolios over the one-year period to 30 June is over 7 percent. Over five and ten years, the performance is 3-4 percent and over three years just over 2 percent.
Martin Groos is a member of the management board at Universal Investment Luxembourg, a knowledge partner of Investment Officer.