GAINS and STRAINS: Funds Europe looks at the changing investment attitudes among eight major European pension funds: AP3 (Sweden), DMGT (UK), Pensioenfonds KBC (Belgium), Oslo Pensjonsforsikring (Norway), NTMA (Ireland), KEVA (Finland), ABP (Netherlands) and FRR (France).
|We will continue to build a leading, cost-effective management structure. We have come a long way in our strategic development. At inception in 2001 our aim was to outperform our benchmarks – a target we have since revised. Today our target is a 4% average real return per year over time, which is why we focus on total portfolio risk. By diversifying our assets and management strategies we have put in place a structure to generate strong risk-adjusted returns in line with this target. The method behind this is dynamic management of the total portfolio and cost-effective exposure to different assets. |
The financial markets will pose a major challenge in the near term.
With risk-free interest rates close to zero due partly to the size of central bank stimulus packages, we need a relatively high level of portfolio risk to generate the returns required by the pension system. And we need to achieve this while avoiding excessive volatility in those returns.
In the light of events on the financial markets in 2008 and our positive experiences of strategic allocations and alpha management, we implemented a major change in our investment model during 2009 and adopted a structure whereby we divide the total portfolio into different risk categories as a basis for asset allocations.
|Daily Mail & General |
Head of Investment
|Asset markets have achieved a fragile stability, despite the underlying strains. An increase in volatility is probably one of the easier calls to make for the remainder of the year.|
We are cautious of government bond markets given the potential imbalance between the level of required issuance to finance budget deficits and the level of demand. Equity markets also appear to be discounting a robustness of economic recovery, which may not actually be delivered for some time to come. And skilled management will be required to maintain stability in the, apparently, incredibly strong Chinese economy. The recovery in prime property prices also limits the valuation upside that’s still available.
Although we continually review the attractiveness of potential new asset classes for investment, the current focus is on how the recent closure of the main scheme to new entrants should be reflected in overall investment strategy. Until this, and consideration of appropriate risk management initiatives, is concluded, investment into new asset classes is not the top priority.
|We see the greatest opportunities in direct real estate in Europe, equity emerging markets (New Asia) and secondary private equity. We are however not considering investment in any new asset classes or strategies.|
|In the current environment we think the right investment decision is to overweight risk and underweight duration. The greatest opportunity available at the moment is in private equity. The pension fund is always on the look out for new asset classes or strategies in which to invest.|
former Chief Executive
|The challenges which Ireland faced in the international bond markets coming into 2009 were exceptional in terms of the level of our funding requirement, investor sentiment, competition for available funds and market volatility. |
However, the strong liquidity position that we built up in 2008 enabled us to time our entry into the markets carefully and to take advantage of more positive investor sentiment towards Ireland as the year progressed.
The fund’s equity investments were the primary contributor to its strong return in 2009. Equities, having fallen in March 2009 to their lowest levels since the onset of the financial crisis, have since sustained a strong rally through the year end as increasing evidence of economic stabilisation emerged and corporate profits exceeded analysts’ lowered expectations. The strength of this rebound, however, has left markets vulnerable to earnings disappointments and weakness in economic indicators.
|“The Finnish local government pension fund (Keva) expects that 2010 will be a very challenging year for investors as the outlook for the real economy remains highly uncertain. The global economy has shown several positive indications, but in part only due to the extremely gloomy events in the previous years. Compared with those, the current outlook is positive. 2010 will probably tell whether and to what extent the global economy will recover from this cold spell. |
The current financial situation entails great uncertainty for investment operations. The rewarding risk-taking climate of 2009 is unlikely to continue much longer, because the financial basics are not solid in all respects. On the other hand, the financial performance of some companies has offered positive surprises, so it is possible that the investment markets’ near future may turn out to be quite tolerable.
|Stichting Pensioenfonds ABP|
|The risk framework for the new strategic investment policy of ABP, the pension fund for employers and employees in service of the Dutch government and the educational sector, was formulated to ensure the portfolio performs relatively well in a variety of economic scenarios. |
Although ABP’s management believes that a certain level of risk is unavoidable, it has included risk limitation in the new policy in certain areas, eg risk associated with interest and inflation.
The main changes in the strategic portfolio are intended to provide a better picture of the trend over time of the real liabilities, taking into account the provisional indexation: a higher weighting factor for investments of which the rate of return is linked to inflation; a decrease in the weighting factor of non-government loans; a decrease in the weighting factor of stocks in developed markets; an increase in the weighting factor of stocks in emerging markets.
|Fonds de réserve|
pour les retraites
|The French pension reserve fund (FRR) implemented a new investment strategy as of June 2009.|
The new strategy has brought about a number of changes. The fund now factors extreme scenarios into its investment approach. It has taken on board the new macro-financial context and the existence of these severe risks. The fund also said its new strategy includes a more dynamic and flexible investment policy and covers liabilities in real terms. But not everything has changed. The fund will continue to hedge 90% of is currency exposure and will keep its Eurozone overweight. Investments in equities and bonds made within the Eurozone represent about 60% of their relative weight.
The FRR will also maintain its commitments as a responsible investor.
©2010 funds europe