Institutional investor intentions over the short to medium term reveal a clear shift in target asset allocations from core to alternative investment classes, according to new research by bfinance.

The fifth bi-annual Pension Funds Asset Allocation Survey, conducted amongst institutional investors in Europe and North-America, has previously found the same trend in their study of June 2010.

Contrary to expectations, the second half of 2010 has seen an acceleration in pension funds decreasing investments in fixed income driven by tensions over the bond markets, as a result of Europe’s sovereign debt crisis.

A further sharp divestment (net decrease of 27%) in fixed income is expected in the next six months, though this will be less pronounced (net decrease of 6%) over the next three years.

The outlook over both six months and three years is one of pension funds looking to diversify away from core asset classes to property and alternatives, with infrastructure and private equity attracting the strongest interest, as illustrated by net increases of 14% and 10% respectively over the last six months.

Equities are expected to experience the highest degree of long term disinvestment, with a net decrease of 14% over the next three years, suggesting that the current uptick in interest in equities may be short lived.

Respondents are planning to reduce exposure to both domestic equity and bond markets, in favour of global investment as a means to diversify and reduce risk.

The survey also indicates that more pension funds have re-evaluated their investment managers over the last six months, with reviews of asset allocation and mandate expiry becoming an increasingly important trigger for investment manager changes rather than underperformance.

Olivier Cassin, head of research and development at bfinance, said: “The recent decrease in allocations to fixed income and switch to greater equity exposure reflects tensions in bond markets and more attractive yields available from equities. As valuations adjust, this trend will lose steam. What is unlikely to change is the growing demand for alternatives.”

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