GERMANY - Hoechster Pensionskasse (HPK), the €5.3bn pension fund for companies that were part of the old Hoechst chemical conglomerate, says it is wary of investing in alternative asset classes currently due to what it perceives as weaknesses with the products.

In an interview, HPK's top management said that while it was continually looking to optimise the fund's investment strategy, they had so far not found a way to do so with alternatives like hedge funds.

"Our challenge is that we want steady and reliable returns. But the products out there are non-transparent, expensive and hard to account for. It is therefore difficult for us to justify investment in these products," said HPK chief investment officer Andreas Hilka, who spoke to IPE at the fund's office in Frankfurt's Hoechst industrial park.

But Hilka stresses that the fund's attitude toward alternatives will change. "Five to 10 years from now, we will be discussing alternatives far more intensely. By then, I can't imagine awarding plain-vanilla mandates like for European equities or bonds. That's because the alpha that is generated by these managers is just not big enough to justify a big engagement in these mandates," he says.

Due to the imperative of offering a guaranteed return of 2.75%, HPK's investment strategy is security-oriented. It invests 55% of total assets directly in investment grade bonds, including Pfandbriefe (covered bonds).

HPK invests another 23% in bond and equity funds, though 5% goes to the latter. The bond funds invest in European government debt and corporate debt.

HPK allocates the remaining 22% to real estate. But unlike other German pension funds, which either directly invest in properties or, as is increasingly the case, buy into international funds, HPK has the remainder in building loans.

Said HPK chief executive officer Joachim Schwind: "With building loans, you get between 80 and 100 basis points more in return than 10-year German government bonds and have steady cash flow."

HPK's net return for 2005 came in at just 4.8%, below the 5.1% posted in 2004 but above the guarantee of 2.75%. However, CIO Hilka said HPK's market return for 2005 was notably higher.

A full profile of the fund will appear in an upcoming issue of IPE magazine.