July 24, 2024 — Equity allocations are at all-time highs in German institutional investment portfolios thanks to several years of strong capital appreciation. As institutions think about rebalancing toward more traditional target allocation ranges, many are eyeing alternative asset classes.
Over the past decade, equity allocations among German institutions averaged 10%, with meaningful ups and downs due to fluctuations in market performance and asset valuations. From 2022 to 2023, average equity allocations jumped by 10 full percentage points to 21% of total assets, according to data from the Coalition Greenwich Voice of Client 2023 Continental European Institutional Investors Study.
Capital appreciation in equity portfolios has taken share from real estate, which saw a significant reduction in average allocations over the period, and to a lesser extent, fixed-income and alternative asset classes.
“German institutions’ current allocations to alternative asset classes lag those of institutions in other European countries and are far smaller than those seen in the U.S.,” says Christopher Dunn, Head of Investment Management - Continental Europe at Coalition Greenwich. “Over the next three years, German institutions are planning a renewed push into alts, with a focus on private equity and infrastructure.”
Rising Rates, Shifting Priorities
Around the world, the rise in interest rates has helped restore pension funds to healthy funding levels. In Germany, average funding levels for corporate pension funds increased from 78% in 2021 to 93% in 2023. Similarly, German public funds now report average funding levels of 108%.
“After years of central bank intervention, there is now a clear light at the end of the tunnel for German institutional investors,” says Christopher Dunn. “In 2024, institutions have turned their attention to locking in robust funding levels, achieving return targets in what remains a challenging market environment, and honing the details of ESG policies in the face of new regulatory guidelines.”