* Demand for European equity fund picks up
* Long-term buyers look beyond Cyprus crisis, Italy deadlock
* Annual returns of 7-9 pct targeted over 3-5 years
By Francesco Canepa
LONDON, April 9 Long-term investors are
tiptoeing back into European shares after a five-year exodus,
expecting annual returns of 7-9 percent and bringing in billions
of euros that should drive the market higher.
While it is too early to talk of a major shift into shares
from bonds, where long-term buyers are primarily invested,
demand for European equity funds has picked up since late 2012,
spurred by central bank action to stem the financial crisis.
This support has allowed long-term buyers to look beyond
obstacles such as the Cyprus crisis and mixed economic data and
buy dips in equity markets, pushing the MSCI Europe
index to a 4-1/2 year-high in March.
These new buyers, especially retail clients burned by the
financial crisis in 2008, sat out equity rallies in 2009 and
2012, Lipper funds data showed.
Their return to stocks, after halving their exposure since
2008, would be a very positive signal and, due to their large
firepower, could be a major market driver in the coming years.
A return to economic growth in the euro zone - expected
towards the end of the year - would probably see the buying
"This market is driven by investment flows, which are
totally favourable to equities at the moment, boosted in part by
central bank liquidity," Xavier Lespinas, head of equities at
SwissLife Banque Privee, which has 3.2 billion euros ($4.11
billion) in assets under management.
European funds invested in the region's equities recorded
their largest monthly net inflow in five years in January, the
latest month for which Lipper data is available, extending a
positive trend started when the European Central Bank pledged to
help struggling countries in September.
But, at 318 billion euros, their assets are still just 60
percent of their 2007 peak, leaving scope for further growth.
This is even truer for U.S. funds invested in European
shares, which have assets equal to a seventh of their end-2007
level, even after three consecutive quarters of net inflows.
The new money has chiefly come from high cash reserves and,
to a much lesser extent, government debt as bond-buying
programmes from central banks drove down yields and pushed
returns on cash into negative territory.
The expected annual return on European shares, measured by
their dividend yield, is 3.6 percent this year, compared with a
1.3 percent yield on German 10-year bonds, Reuters data showed.
"You have to come back to riskier assets if you want to
maintain the expected returns that you have as a target," said
Mouhammed Choukeir, chief investment officer at Kleinwort
Benson, who has been adding to his equity holding this year.
"You could see annualised returns of about 7 or 8 percent
over the next few years although it's going to be bumpy along
The average return on the pan-European MSCI Europe
index since 2002 is 5.5 percent, Datastream data showed, so a 7
percent return would represent a 27 percent outperformance
compared with the index's recent history.
Since the turn of the year, each time the MSCI Europe index
has fallen more than 1.5 percent in a session, buyers have come
in and the index has cut its losses by the market close.
Among the dip-buyers was Didier Duret, chief investment
officer at ABN-AMRO Private Banking in Geneva, who manages some
170 billion euros and is targeting annual returns of 7-9 percent
in the next three to five years on his equity investments.
He said private and institutional clients who had largely
missed out on a market surge in the second half of last year had
finally grown more confident that the darkest hour of the euro
zone crisis was passed.
"We're seeing a lot of requests from clients that want to
put in place equity portfolios not based on the short-term
momentum considerations but for...three to five years," he said.
Global insurers and pension funds, with combined firepower
of $59 trillion, according to Deutsche Bank, are also
considering boosting their equity holdings, albeit more slowly.
"There is a block of investors who are taking long-term
views on the market again," said Andrew Milligan, head of global
strategy at Standard Life Investments, who has increased the
share of equities in his 160 billion pound ($242.06 billion)
portfolio to about a third of in recent months. He expects
annual returns of up to 9.5 percent over the next 10 years.
"It's a slow evolution of how some pension funds are
repositioning themselves, but it's far from being anything
dramatic and quick."