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Although many of the changes affecting the Belgian institutional asset management arena have not been as dramatic as those of the previous year, 1999 brought new developments for this small market. All of them were overshadowed by the poor performance of the Belgium stock market.
Beginning with last year’s Fortis/Bank Générale merger and the more recent union between Dutch group ING Investment Management (ING) and Belgian player BBL Asset Management, the number of players has been considerably reduced following the global trend of big firms coming together.
However, all the recent changes within the industry were overshadowed by the poor performance of the belgium stock exchange.
Belgian institutional investors were criticised domestically for investing too much outside Belgium thus hitting the market. Asset managers agree on the fact that these criticisms are completely unfounded.
“Most of the big changes regarding the move in asset allocation towards the Euro have already been implemented before last year,” says Johan De Ryck, manager of institutional management and investments at KBC in Brussels. “According to the figures provided by the Belgian association of pension funds (BAPF) the investment in Belgian equities dropped from 18% to 9%, but the impact of this on the bad performance of the stock exchange is minimal.” He adds, according to the BAPF: “Eighteen percent asset allocation in Belgium equities by pension funds means 1% of the cap market. Even though the exposure have been reduced by half , we are talking about a very small proportion of the market.” The total assets under management by second pillar pension plans in Belgium was E10bn last year; with 235 plans in total of which only four managed more than E500m.
De Ryck believes that one of the main factors for the bad performance is that some of the largest companies listed in the market have left . “Also, it’s important to highlight that the Bel 20, the Belgian blue chip index, is dominated by banks which are very interest rates-sensitive. The Brussels stock market should aim for more diversification and the development of a niche in mid- and small capstocks.” The lack of technology companies and publicity are other factors to be taken into account.
“In my opinion, the main reason for this situation is that on top of the selling from inside Belgium, there is no demand from outside,” says Karel Stroobants, president of the Belgium pension fund association “There is no demand because there is no image, and our market is not transparent and quite illiquid. It’s true that we have some good companies but they don’t communicate,” he adds. “They are not used to going to London to make presentations. We have a market without an image.”
Stroobants also highlights the influence of click funds with a guaranteed payback which boosted the market for a period of time. “Those funds are protected by derivatives because they guarantee certain returns. With the situation of the market now I don’t now what the effect of these derivatives behind those structures will be,” Stroobants says.
“When private investors who had subscribed to this type of shares started getting out of the market and selling them, institutional investors didn’t want to take them even at a discount price,” says Sylvie De Cooman, associate director of institutional portfolio management at Brussels-based Bank Degroof. “Institutions decided to relocate portfolios focused on Euroland and the investments coming from outside was not enough to absorb this outflow from Belgium. So, I believe that individual investors made the whole situation more dramatic withdrawing money from those click funds.”
However, the fact remains that Belgian pension funds have moved to Euroland, and this has been confirmed during recent months. The pension fund market in itself has not grown much, although a small development is expected. A law published in May 1998 allowing multi-employer pension funds could bring a big push within the industry. This enables firms to join together in a pension plan. This will especially benefit small and medium-sized companies whose only option before was to use a group insurance, as they can gain access to a pension fund vehicle.
“Only one third of the people covered under second pillar funds are members of a pension plan. All the rest use group insurance,” says Stroobants. “Sector and multi-employer funds are becoming very important, and they will be managed in a different way from the beginning. This is quite a remarkable move.”
“We are still waiting for the Royal Decree to be published but I believe that, for the year to come, this will be the most important evolution in the Belgium pension fund market,” says Yves Van Langenhove, executive director for institutional business at Fortis Investment Management. “I think that most of the new pension funds to be created will be defined contribution DC plans.” He adds: “And we are waiting for it. We already have clients who have DC plans and we have developed a tool which allows an individual choice of Ucits or portfolios managed according to the risk profile they prefer.” Individual members will be able to access a web site where they can check the value of their accounts. “However, the number of choices will depend on the employer who will decide whether he wants to offer one, two or more risk profiles and so on,” he says.
Developing the right strategies to allow DC plans to run smoothly seems to be a main concern for asset managers. “We are definitely moving to a system where the individual member of a pension fund wants to chose. Everyone is focused on setting up a more active participation in the asset allocation process,” says De Cooman. “For us this would make a difference, of course, when you have to split a portfolio in two, three or more risk profiles. But I think this means more trouble for consultants than for asset managers.”
The DC/DB debate is part of ongoing political discussions. Stroobants has his particular view on the subject: “I call the DB/DC debate the ‘who is going to take the risk and at what price debate’. You can abuse both systems, so I believe hybrid plans are the best solution because they keep the risk with the plan sponsor offering the mobility and transparency of DC plans.”
He continues: “One out of three employees have access to second pillar pensions and we are talking about mainly white collars, highly paid people. It’s very difficult to transfer a system which was made for white collars into something suitable for blue collars. For the latter, a second pillar pension means a basic additional income on top of a first pillar which is shrinking. It’s not a kind on compensation on top of the social security as it’s been seen for years. We are talking here about a basic income.”
Stroobants adds that unions are quite reluctant to a move to pure DC plans although they support the creation of sector funds which are more blue-collar-friendly. “But asset managers are clearly promoting DC plans, and we have to accept it because at the end of the day it’s their business.”
“Some of the problems we are facing now could be solved by creating additional DC possibilities,” says Hugo Lasat, managing director at Cordius Asset Management. “We have a very good first pillar, and a quite good established second pillar, either through group insurance or pension funds. The regulating authorities should do something to promote more additional possibilities in the third pillar.”
“Local players have a very important role to play in the creation of new sector funds,” Lasat adds. “We are on the front seat of what’s happening and there are no reasons for institutional clients to believe we don’t have the expertise they need.”
“Education is a problem we have to deal with. Once you’ve got the legal framework you have make people whose major concern is not finance interested in the subject.”
Lasat adds: “Asset management is not something which is bought. It’s something which is sold. It is very important to have a good marketing strategy and sometimes you have to be a bit paternalistic and try protect people, because it’s their money they are investing for the long term.” Both corporations offering DC plans to their employees and the financial intermediaries will have a great responsibility, he believes.
As the market is becoming more sophisticated, the use of consultants is also increasing. “Pension funds are using more the services of consultants in terms of investment advise,” says Peter De Proft executive director at Banque Nagelmackers in Brussels. The bank started managing portfolios for institutional clients in 1996 specialising in the hybrid sector called social security funds, which are being set up by newly privatised state bodies. “Although the pension fund industry in Belgium has not been growing much during recent years, the social security funds are showing quite an interesting evolution, and that’s the sector we are focusing on,” De Proft says.
“There is a greater interest of the public sector at present in the creation of pension funds, both in the first and second pillar,” says KBC’s De Ryck. “This comes at a time when local public authorities are realising that their institutional reserves are sub-optimally invested and that a switch to longer term investments increases the upside potential of returns,” he says.
In terms of competition, the number of Belgium asset managers has shrunk as a result of mergers and acquisitions.
“We can see fewer local competitors in the market, says Cordius’ Lasat. “Some local players have merged while others don’t follow the requirements of institutional pension funds in terms of reporting and investment styles,” Lasat says. “So they can’t cope with the increasing professionalism of institutional clients any more.”
Lasat comments that institutional asset management is becoming a specialist area in itself, with specific industry requirements. “Some of the managers have not been able to meet this criteria and have been left behind.”
The activity of foreign players is increasing. Local players can still compete, but it’s getting tougher. “We’ve had a huge shift in asset management providers,” says Stroobants.
“The market has come from a very classical approach where the house bank of the company, which was a Belgian banker, offered the asset management service to the pension plan which consisted in one or two mandates. Today, every bank has made its asset management department independent,” says Stroobants. The last one has been KBC who, from this month, will be operating under the name of KBC Asset Management. “We now have a completely different market where foreign asset managers can easily gain market share, especially the Americans. Local houses are moving towards a greater specialisation. If they don’t follow that direction they will disappear,” Stroobants adds.
“There is an increase in the use of foreign players by Belgian pension funds,’ says Nagelmackers’ De Proft. “For instance Belgacom is using mostly foreign players for its new mandates. Generally, there are more expensive than the local.”
State Street Global Advisors started its operations in Belgium 10 years ago. “Pension funds is our core business, whereas other foreign firms are more focused on retail investments,” says Jean-François Schock, managing director at SSgA’s Brussels office. “More names are now coming into the institutional market, but we believe we have a better know-how about these more sophisticated investors.” SSgA is also benefitting from its expertise in bond investing. “In Belgium, pension funds have traditionally invested more in foreign equities than other European funds,” says Schock. “The proportion in foreign equities for pension funds is one of the highest in continental Europe. Other continental pension funds are still moving from a high bond exposure to equities.”
He adds: “What we are seeing in Belgium, and elsewhere in continental Europe is an important move to corporate and high yield bonds which is a great opportunity for us because in the US we have a proven expertise in credit analysis managing which we can transfer to the management of European bonds.”
Competition is also forcing managers to adopt different strategies in their relationships with clients. “The fact that you are big does not mean that you are better equipped to do asset management,” says De Cooman at Degroof. “Big institutions have so many clients that they can’t offer personalised service and this is becoming an important issue. Here we are focused on trying to improve what we already have trying to develop better tools.”
Her colleague Dominic Sanasi, says: “The manager should not be someone who hides behind a mandate. Some managers are like that and they put their mandates between them and their clients, when they should be on the same side and looking at the benchmarks together.”
In the coming months, regulations regarding pension funds will be the major issue affecting the institutional asset management market in Belgium who are getting prepared, not for a boom within the pension fund industry, but for a positive evolution.
“We are waiting for the market to open and we think more and more pension funds will be interested in outsourcing services like administration, accountancy and communication,” says Van Langenhove at Fortis. “We already have the tools to offer what we call ‘a full service product’ to meet this trend.”
All the improvements within the asset management industry are giving Belgian firms a greater chance in the international scene. “This is a very good opportunity for asset managers to go outside Belgium,” says Lasat. “We can offer our expertise on international classes, perhaps on a traditional way, to outside institutional clients.”
“In terms of portfolio diversification, there is a trend to use corporate bonds and other products like private equity, but it’s very small,” he adds. “It’s what I call ‘intellectual satisfaction’ but it’s not important as yet.”
Investment on sector-basis is also popular among managers who have been using the approach for the last few years. However some believe that this approach has still a long way to go. “We are setting up a system which allows us to monitor portfolios and benchmarks on sector-basis, so at the same time as we were reporting to our clients on a country basis we are now able to report on a sector basis,” says Sanasi at Degroof. “But to make the asset management on sectors is a different issue, because to my knowledge there is no analyst that can tell me today that one sector is going to do better than another. They can make analysis and estimations but that is as far as they go.”
Although most of the asset managers agree on the professionalism of the industry, Stroobants is more critical: “This is a very closed market. Everything to do with pension funds is confidential and there is a huge need for more professionalism and transparency, not only from the asset management side but also from the pension fund sponsors.”

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