Nearly half (46 per cent) of European pension fund professionals say increasing portfolio diversification is their top strategic asset allocation priority, research from Alpha Real Capital has revealed.

Portfolio diversification was found to be the most popular priority, ahead of increasing expected returns, which was identified as a priority by 28 per cent of respondents, and increasing portfolio income, prioritised by 18 per cent.

Alpha also found that European pension funds were concerned about high inflation, with only 7 per cent of respondents saying they were not worried about this issue.

Over 70 per cent of survey respondents said they managed their assets to an inflation plus benchmark, with 88 per cent looking to beat their strategic benchmarks by 1 per cent to 3 per cent over the long term.

The survey also discovered that 56 per cent of pension professionals hedge less than 50 per cent of liability inflation risks, while 20 per cent do not hedge liability risks at all.

Alpha found that just over a fifth (22 per cent) of respondents were looking to increase inflation hedging.

Alpha Real Capital client solutions director, Colin Frearson, commented: “Rising inflation is a real threat for European pension funds unless they have taken steps to hedge their exposure.

“Investing in real assets that include inflation linked returns – such as infrastructure and commercial real estate – can be a powerful way to help mitigate against the risk of rapid price increases that we are experiencing in the current environment.”

Alpha Real Capital CEO, Phillip Rose, added: “Ongoing geopolitical tensions make for unpredictable markets and have contributed to an inflation surge. It makes sense that European pension funds’ top strategic priority is to diversify portfolios and include non-correlated assets.

“Investing in real assets with secure income flows that do not respond in the same way as traditional assets such as equities and bonds, can help keep volatility under control while simultaneously delivering strong inflation linkage.

“For example, Alpha’s secure income real estate investments have shown exceptionally low volatility over the last 12 months while delivering reliable income with annual inflation-linked increases.”

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