The €7.5bn pension fund of telecoms giant KPN has confirmed that almost two-thirds of its annual return of 22.6% was due to its deployment of derivatives against various risks, including an interest hedge.
In its annual report for 2014, the KPN Pensioenfonds said the actual return on investments was 8%.
Over the course of the year, the scheme decreased its interest hedge of liabilities – through a combination of fixed income holdings, interest swaps and swaptions – from 85% to 61%.
It generated a 10.1% return on its fixed income portfolio, with Dutch residential mortgages returning 9.1%.
The pension fund said it increased its strategic allocation from 2.5% to 10%, while also raising its stake in inflation-linked bonds from 12% to 15%.
Equity delivered 9.5%, with actively managed global and emerging market equity, and passively managed European equity, returning 11.7% and 5.1%, respectively.
The pension fund replaced 5% of its global equities with an equal stake in European equities, “as they were priced more attractively”.
Listed real estate, returning 26.2%, was the best performing part of the property portfolio.
Actively managed property returned 5.5%.
The KPN scheme attributed the 20.5% loss in commodities to falling oil prices and replaced all its passively managed investments – through future contracts – for actively managed holdings in the asset class.
According to Cees Michielse, chairman of the scheme’s investment committee, the adjustment was part of a periodical reassessment of the entire investment portfolio.
“The fixed monthly extension of the futures appeared to be predictable, allowing other market players, such as hedge funds, to anticipate,” he said.
The pension fund also divested its remaining stake in hedge funds.
“Already a couple of years ago, we expected better results from equity and bonds, and this prediction has come true,” Michielse said.
In December, the KPN Pensioenfonds sold the put options it had used to hedge the equity risk in developed markets.
On the back of rising equity markets, these derivatives came at the expense of 0.5 percentage points of the annual return.
The scheme said it spent 0.34% of its assets on asset management and 0.03% on transactions.
The KPN Pensioenfonds, which has 58,250 participants, is on course to merge with the €900m Ondernemingspensioenfonds KPN – the pension scheme for nearly 2,000 KPN staff who are not employed under a collective labour agreement.
The Ondernemingspensioenfonds KPN returned 21.2% last year.
As of the end of March, the schemes’ policy coverage ratios stood at 111.2% and 114.3%, respectively.
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