Creating the right chemistry
The Fonchim pension fund is an example of one of the new ‘contrattuali’ funds. It was established in 1997 for the workers of the chemical and pharmaceutical industries, in anticipation of the decree to enact the 1993 reforms. It started with a membership of 70,000 which has since grown to 115,000.
The fund has grown significantly since its first year of operation. In 1999 it accumulated E100m of assets; today pension assets total E950m, which is roughly in line with the growth in total assets of the contrattuali segment. “The growth was due to the tax incentives and to a lot of communication by us to the members,” notes Andrea Girardelli, director of the fund.
Fonchim is typical of contrattuali funds in that it started off with a single, conservative portfolio. Currently equities account for 30% of this portfolio, and of this a third is invested in Italian equities, nearly half in Europe ex-Italy and the rest in the US.
Fonchim operated with a single investment line until January 2003 when it set up two additional lines, a monetary option and a balanced option with 60% equities and 40% bonds.
However, Girardelli notes that the new offerings have not generated much of a reaction among members. “Since then not more than 400 people have changed; there are still 93% in the original line, with 5% still in monetary line and 2% in the balanced line.”
Currently Fonchim uses the MSCI global benchmark. Girardelli explains: “We give a benchmark to the fund manager and then they decide what to invest.”
The fund sets minimum ratings for bond investments. In the case of corporate bonds this is set at triple-B. It uses the SSB government benchmark for government bonds. High yield is avoided as it is considered too risky.
As with all new funds that came into being following the 1998 decree there is no investment in real estate. “We are going to ask for more defined accounting rules,” says Girardelli. “It is not a problem for the moment, but it might be a problem for the future performance of the fund. The return of real estate investments is steady and good.”
Fonchim has adopted a conservative strategy. “The fund doesn’t want to take risks with other people's money,” says Girardelli. “We do not have to become rich. If participants want to become rich with their pension fund they should go somewhere else.”
Girardelli describes the fund’s underlying investment philosophy in one word: “Safe.”
When the fund was set up it had three managers that were specialised in monetary management and another three that ran balanced mandates. Last month Fonchim introduced specialised management.
Rothschild will manage the monetary line and Pioneer investment will take care of the small balanced mandate. The main fund will be managed through four mandates. The mandate for the portfolio with 60% equities and 40% bonds will be managed by Pioneer and Duemme. Duemme will also have the corporate bonds mandate. Templeton will manage the equity mandates; San Paolo IMI and Credit Agricole will have the government bonds mandate.
Part of the reason for the move to specialised mandates was the need to establish better control. “Now that asset allocation is our responsibility we could for example give more resources to Templeton and fewer resources to Credit Agricole,” notes Girardelli. “Before, each of the six managers received one sixth of the contributions.”
But there was a more important driver behind the decision to move to specialised mandates. Girardelli: “Low risk is our main priority but we thought we could earn some additional basis points of performance through specialised funds. This was more important than control.”
In spite of the suggestion by some that offering a choice of investments is a waste of time, given that members usually lack the requisite knowledge, Girardelli is confident about the fund strategy. “If you don't start you will never have it,” he says. “It doesn’t cost a fortune and we wanted to give a better service to our members.”
It’s best not to leave important issues on the back burner, especially when they concern investments.
He adds: “You cannot wait until your fund has E10bn and then introduce multicomparto; you have to get the expertise in advance. If not you as a fund manager will have trouble managing the structure.”
The board has 14 members with equal representation from the company and the unions. The board also has three investment experts. Each month it has a meeting with the asset managers to discuss asset allocation.
“In the past the meetings with the asset managers took place every six months,” notes Girardelli. “We have changed to meeting every month because we want to know how the new specialised managers are getting on.”
If the performance is good the chemistry should be right.