ALM is just one part of the process
• Invested assets: €2.5bn (including APK's Vorsorgekasse)
• Participants/members: 90,000
• Both DB and DC
• Solvency ratio: 100% (as of January 2009)
• Date established: 1989
We have a large number of different asset and risk groups (Veranlagungs-und Risikogemeinschaften - VRG) at APK, which are all managed according to their targets. Some are DB, others are DC, and some are more conservative, while others are more return-orientated.
Most of our asset allocation is undertaken internally - depending on the VRG, it can involve quite intensive communication with the client company - and we believe it would be difficult to transfer the complete asset allocation to a third party.
However, for asset classes that require a complex selection process we award external mandates. In other words, our equities and corporate bond investments are managed externally. And while we manage our direct real estate holdings internally, our indirect property investments are moved to external providers via absolute return mandates.
We undertake our own asset liability management (ALM) studies for the DB plans but ALM studies are just one piece of information we use for structuring the asset allocation, because we think there is no immediate link between the age structure of the beneficiaries and the positive or negative development of the markets in different asset classes. Therefore, on top of the ALM studies, we also involve the cash flow and liabilities structure and look at market developments independent of the other criteria.
We optimise our strategic portfolio at a risk-factor level for all individual asset classes in order to obtain a good asset allocation structure. This is done based on scenarios rather than historical analysis because past performance can be unreliable and would alter assumptions, particularly after the volatility of 2008.
We tend to review our strategic asset allocation on an annual basis although, if necessary, we have also been expanding the bandwidth of the various asset classes between reviews.
We take advantage of our dynamic asset allocation process too. This means we can dynamically exploit the tactical bandwidths of asset classes in the short term with the help of various instruments, such as derivatives, cash or cash flow steering.
However, we do not undertake any rebalancing in the classical sense according to a fixed mechanism. We worry that by doing this we could invest in an asset class that continues to nosedive. We rebalance in consideration of the macro-economic situation, the evaluation of the specific asset classes and based on whether the asset class still contains a large risk in order to make the most of any opportunities.
• Fiduciary manager for pension funds
• Assets under management: €60bn
• Clients: 18 (pension funds and insurers)
• Cover ratio: 117% (estimate September 2009)
• Date established: 2001
We create a plan with our pension fund clients for the next few years ahead, in which we translate the pension fund deal - which is about premiums, inflation indexation and investment strategies - into an investment policy. In other words, our role is to facilitate the pension fund boards' decision-making.
It is particularly important that the pension fund makes clear and transparent decisions and takes its own steps with regard to risk taking and real and nominal investment policies, and does not solely rely on the outcome of an asset liability management (ALM) model.
Ultimately, we need ALM studies to support the process but it is important to bring ALM studies and common sense together and bring economic scenarios to the table.
We do not see strategic asset allocation as a static process but view it more as a dynamic one that includes those different scenarios.
Fundamentally, two reasons are particularly important when it comes to reviewing our clients' strategic asset allocation. First, is that the financial position of the pension fund has changed, meaning, for example, that the funding ratio of the pension fund is different to what it was before.
Second, is a different view on economic scenarios. The third point could be that the risk appetite of the pension fund board has changed in a dynamic asset allocation process.
Of course, analysing scenarios is a continuous process and we recalibrate them at least on a quarterly basis. That does not necessarily mean that we will change anything in the portfolio, but a change in economic scenarios could lead to a rebalancing.
We optimise strategic asset allocations by first taking the long-term expectations into consideration and then fine-tuning the portfolio on short-term economic outlooks.
For interest rate and currency hedging we use both derivatives and physical bonds. Some clients are also willing to use physical bonds only.
What is related to the trade-off between the use of derivatives and physical bonds is the split we make between the matching and the return portfolio. The ratio between the two is one of our key components in the strategic asset allocation process and is linked to the financial position of the pension fund and the risk appetite of its board.
During the market downturn, we did rebalance for some of our clients with active risk-reducing programmes and cut their risk by selling equities.
• Invested assets: c.£27bn (€30.1bn)
• Participants/members: 264,000
• Funding: 82% (technical provisions basis as of November 2009)
• Date established: 1975
As an open and cash-flow positive defined benefit (DB) scheme, the Universities Superannuation Scheme (USS) has a long duration profile. Its assets are primarily return-seeking rather than risk-reducing.
Strategic asset allocation is the responsibility of its trustee board, which is advised by an investment committee. The committee, in turn, draws on the internal investment team as well as external actuarial and investment advisers. It is currently comprised of four trustee members and four investment experts with complementary asset class and investment-related experience.
The strategic asset allocation process starts within a quantitative framework involving long-term risk and return expectations for assets in the investment universe and asset-liability optimisations. The results are tested for robustness to varying assumptions and stress outcomes. They also undergo a number of qualitative sense-checks.
We do not currently include derivatives within the strategic asset allocation except for forward currency hedges and a planned synthetic equity or liquidity pool. However, derivatives are used for tactical asset allocation and risk management.
USS undertakes formal triennial asset liability management (ALM) studies, at which point the strategic asset allocation is reviewed. In the interim, the strategic asset allocation adapts to the roll-out of particular programmes, for example, investments in alternatives, and in response to significant changes in the funding ratio or relative market valuations.
But given the preponderant exposure of public equity, the rebalancing required following the big market downturn last year has been less than in funds with more in high-grade fixed income. The extreme market adjustments called for attention but not for knee-jerk reactions. Importantly, the scheme did not reduce market exposures at the bottom. Instead, we are introducing a liquidity pool, backed by synthetic equities to facilitate rebalancing and to address cash flows associated with foreign exchange hedging or other cash calls. We will also be strengthening our tactical asset allocation activities.
The asset allocation can be classed as dynamic because we target progressive build-ups or reductions in certain asset classes or strategies. The strategic asset allocation may also adjust, based on changes in the funding ratio. Tactical asset allocation is conducted using derivatives. At the scheme level, it is the responsibility of the CIO and, within mandates, of the relevant portfolio manager.
Inteviews conducted by Nina Röhrbein