Living in these interesting times
The arrival of the euro has set the seal on a period of rapid development for Belgian pension funds. Hugh Wheelan reports
Of all the countries in Europe where the euro might be expected to alter domestically driven pension investment profoundly, you could be forgiven for plumping for Belgium. Brussels is of course home to the symbolic heart of Europe – its parliament, and has always been a relatively eurocentric country, whilst clinging to its own diverse nationhood.
However, the reality on the pension fund ground in Belgium is that, if anything, the euro is the final catalyst in a longer-term reaction by Belgian funds – away from the more relaxed business procedures of the past, towards a new professionalism.
According to Johann Heymanns, actuary and managing consultant at Watson Wyatt in Brussels, Belgian pension funds have been through a period of discovery on the crucial importance of procuring good performance, whilst balancing risk issues against their liabilities. And the arrival of the euro is proving to be the final cog in the drive towards quality investment diversity.
“The object now is to put into place a set of investment objectives that adhere to good practice principles. It is a far cry from the days where balanced mandates were handed out to managers after lunch, following advice from other players in the market, and pension fund managers sat back and counted on fairly decent results.
“Asset allocation is now the crux element, and in a recent survey we carried out of 66 schemes (60% of the market) 83% said they were looking at restructuring their portfolios on a specialist basis post-euro, with 67% saying they would undertake asset liability studies – so the shift is a marked one.”
A further trend appears to be the development of core passive investment blocks complemented by satellite active briefs, both on the equity and bond sides. And Heymanns believes Belgian funds are barely even acknowledging domestic assets as a class now, with the accent firmly on Emu and non-Emu mandates.
“The only debate on the agenda is how to garner sufficient but safe diversity in an enlargened investment sphere,” he adds.
Nevertheless, funds holding Belgian bonds do not appear to have gone out of their way yet to replace them with euro debt.
Staf Van den Bergh, member of the board at BBL Asset Management, the investment division of Banque Bruxelles Lambert, explains that clients appear quite happy with the spreads of around 20 basis points from domestic debt, currently on offer. “They certainly don’t appear in any hurry to let go of what is a reasonable comfort buffer, and in our view we can see this continuing for a while yet, although there will undoubtedly be a switch in the future, because liabilities are in euros.
“The big question we are hearing from schemes is how far they should go in diversifying from bonds into equities, because interest rates are now at 4% compared to 8% not so long ago. For many funds though, ALMs are clarifying this issue.”
It is here on the equity side of the Belgian market that the real investment questions are being raised.
Van den Bergh at BBL says the tide is definitely moving in the euro direction, but domestic funds still feel comfortable enough in familiar Belgian waters to limit the flow, although there has been the high-profile exit of the VKG/CPM doctors’, dentists’ and pharmacists’ scheme.
“The trend in equities is definitely away from the domestic market, but not everyone is convinced a straight swap is right for now, if only because the Belgian market continues to perform extraordinarily well. It would be foolish to ditch a market that was offering 40% plus returns last year. What we may see is a two-tier pensions arena in Belgium, with larger funds shifting to the euro-zone, but smaller funds holding fire until the market is more developed.
“Of course a large chunk of the market cap has been removed as a result of mergers such as Total/Petrofina and Generale Bank/Fortis, but with falling interest rates and the increased shift to equities, with their healthy relative attribution rates, the Belgian market is still very interesting. In addition, the Belgian economy is now its strongest in a long time, with budget deficits having been greatly reduced over the last few years.”
Consequently, he concedes that although pan-European sector analysis constitutes a good part of BBL’s post-euro investment strategy, it is not entirely at the expense of geographical factors because he feels that as long as European fiscal and social policies remain unharmonised the market will not behave wholly as predicted.
Yves van Langenhove, head of institutional asset management at Fortis Belgium, sees the move to euro equities as more clear-cut. Fortis is in the process of merging its business with Fimagen, the asset management arm of Belgium’s Generale Bank
“Certainly amongst our clients we are seeing a fairly swift step into European equities with benchmarks built around euro in/out and the rest of the world. Although the Bel 20 gave returns of around 45% last year, and the MSCI was even higher at 50%, much of the market cap has become European now. Anyway, the domestic element in Belgian pension funds was already increasingly limited, so the knock-on effect is not so drastic.
“One thing we are certainly seeing, though, is a ‘ucitisation’ of Belgian pension fund business, for reasons of fiscality and risk diversion, particularly among our smaller clients.”
And Hugo Lasat, managing director of active model-driven manager Cordius Asset Management, says he is also convinced the European market, and certainly euroland, is now sufficiently integrated to be the main investment reference for all Belgian institutional investors. Cordius, formed by the merger of the asset management groups of Paribas Bank Belgique and Bacob Bank, currently manages around Bfr340bn (e8.4m) in assets, including 22 pension funds and 165 institutional clients,
“At Cordius we focus very much on analysis of market valuation coupled with strict quant modelling, and we are being asked to give optimum asset allocation benchmarks to our clients, which as a result does not include any emotional reference to the Belgian market. Our strategic view is that we are now a European asset manager with an investment process focusing investing on a European market.
“It may be that national composites have a place in some portfolios, and I think we could see the euro market splitting between small and large cap stocks. This is certainly the view we are putting forward to clients, and I believe that within two years this will be the reality of European investment.”
Lasat believes the increasing complexity of the manager searches in Belgium shows that this message is being taken on board by Belgian funds. However, he adds that, despite his predictions, the market is not yet behaving as one could expect. “In a survey we carried out to analyse the performance of equities, we found that national influences were diminishing, but were still sufficient to explain a significant part of the returns in a number of sectors.”
As Karel Goosens, managing director at consultant PricewaterhouseCoopers (PWC) in Brussels, comments: “The Belgian market is performing well at the moment so many people are staying put, which in itself is contributing to continued country trends in stock behaviour. But everyone can see the home market risk on the horizon and I think a complete shift into Europe is lurking at the back of fund managers’ minds. So then you start to consider timing and transition impacts and things become slightly less clear-cut. Preparation and caution are happening simultaneously – these are interesting times in Belgium.”
Notable funds though, such as the VKG/CPM fund, have already made a complete euro switch, citing a diminishing Belgian equity market and predicting an overbearing effect on liquidity in Belgium as a result of the euro. And the question certainly appears to be ‘when’ the rest of the market will follow suit, not ‘if’.
Despite the presence of most of the major consultancy groups in the market, none seems outwardly concerned that there is not enough business to go around, particularly in light of the increase in manager searches and asset liability modelling.
Goosens at PWC comments: “The cultural investment changes in Belgium have pushed an incredible amount of work towards the consultants, and definitely towards those which can offer benefit, actuarial and investment advice, because the Belgian market is very much a one-stop-shop arena. Competition is fierce though, and all the consultants have a strategic reason to be in Brussels, so no-one is missing from amongst the big players. And I think the main sphere of development is definitely in investment consulting and reporting.”
As a result of the one-stop-shop preference, Belgium appears to be a market where the so-called general consultants, such as PWC, KPMG and Arthur Andersen, and local players such as Pragma and Conac are achieving good penetration.
However, no one discounts the arrival of more firms into such a promising business environment, and there is also an increasing number of individuals going it alone on the advisory front in specialist areas.
Traditionally Belgian pension funds have operated on a group insurance basis and always made investment diversity a key priority, particularly on the equities side.
Statistics for 1997 recently released by the Belgian Association of Pension Funds show funds with an average of 47.3% in shares, of which almost 30% was already outside Belgium, and this portion has been rising steadily since.
This sea change in investment has meant that balanced mandates, which once ruled the roost, covering around 90% of all funds five years ago, according to statistics by consultant Watson Wyatt, have bitten the dust in favour of specialist briefs brought to the fore by the proliferation of ALM studies.
Nonetheless, in terms of the development of the Belgian pension fund market itself there are a number of conflicting issues both promoting and stifling growth.
On one hand, the political impasse of recent years, which has seen a cap imposed on formerly index linked wage increases, including employee benefit payments, has inadvertently halted the implementation of company pension plans. It is an ongoing national debate and no-one is yet quite sure how and when it will be resolved. On the other hand, though, the privatisation of many of Belgium’s largest state-owned corporations including telecommunications group Belgacom, the Flemish television company VRT and the Port of Antwerp, along with a number of local authority outsourcings, has brought a flux of pension plan business into the market. And the general consensus is that there are more to come.
Custody is still predominately carried out by local banks, according to Belgian law, although a number of funds are already taking advantage of new regulations, now awaiting royal approval, to allow use of any custodian, and are restructuring.
For the asset managers themselves, the last few years in Belgium have been characterised by merger and acquisition.
With BBL swallowed up by the Dutch ING group, Generale joining Fortis in one of Europe’s largest banking consolidations, and Cordius springing from the amalgamation of Paribas Bank Belgique and Bacob Bank, the question on Belgian lips is: who’s next?
KBC, the former Kredietbank, traditionally a Flemish retail operator with a legacy of asset management for pension funds in the north, is a possible target, according to many.
However, in terms of new arrivals within the market there have been a few foreign managers that have implanted themselves successfully. But the feeling is that it would be difficult to start from scratch in Belgium today.
Jean François Schock, managing director at State Street Global Advisors, which has built up a successful Belgian business of $1bn in pension fund assets over 15 years, believes the firm’s timing and products were right for the market when it arrived.
“We are selling for the most part wholesale investment products which are being sold on for us by retail players, and along with Invesco, Vanguard and Unibank have developed a strong market niche. But, on the pension fund side one of the definite trends in Belgium has been in index management, so we are normally on the shortlist for mandates. These are increasingly being coupled with more exotic specialist briefs such as hedge funds and private equity - in part because many pension schemes have contractual obligations where they guarantee 5% returns per annum, and they just can’t get this through bonds or plain vanilla investments these days,” Schock says.
“I think it unlikely though that we will see anyone else, such as other Anglo-Saxon players, come in to the Belgian market. Firstly, it is now very well developed, and secondly, the preoccupation for asset managers today is to become ‘European’ entities and manage European portfolios, regardless of their home countries, and we are seeing this amongst the Belgian community as much as anywhere.”
The prime case would appear to be the merged Generale/Fortis operations. Alliance has given the asset management branch of the joined groups a global reach. William de Vijlder, chief investment officer at Fimagen, soon to come entirely under the Fortis banner, says investment research is now firmly focused on the goal of being a player on the world stage.
“We have been carrying out an extremely labour-intensive operational project to ensure that our analysts are no longer niche experts, but pan-European and global specialists, because we are now naked before the eurozone and the rest of the world. The challenge today is to be wearing the same clothes as the biggest European and global managers, to which we now belong.
“We now have investment teams for example in Paris and Amsterdam operating on a European sectoral basis, scouting out stocks with good growth prospects but also inherent value, which is no mean feat logistically.
“And new dimensions are being added all the time to what we do, such as looking to add value by examining market and sector rotations and correlations.”
Lasat at Cordius is equally as vigorous in stating its claim to be a continental manager: “We are European in concept now, although our statistics show that it is still not optimal (too early) to switch entirely from the top-down country approach to a top-down sector approach. An Emu bottom-up stock selection style, being sector-neutral, is a good alternative.”
Van den Bergh at BBL concurs: “We now operate for the most part on a sectoral basis, but it is just not viable at present to completely ignore the economic geography of Europe, because most investment is still on local indices, and performance attribution is still mainly coming from this direction.”
Guy Freeman, consultant at Towers Perrin, believes the market will be free of solely Belgian players before long: “Big is beautiful for the European asset management scene, and I just don’t think any of the Belgian players have the muscle to go it alone.
“For the country’s pension funds there are also a great number of issues still to be resolved, including the increased levels of volatility arriving in the Belgian market. And should the relevant authorities start to demand IS19 European accounting standards in Belgium, then I think there will be quite a shake-up of the pensions and investment scene in the future.”
However, as Michael O’ Brien, consultant at Towers Perrin puts it, Belgians are as pragmatic as anyone: “There has never been a fear of change in Belgium, and I have no doubts that Belgium will keep up with anything that happens in Europe. It is just in the country’s nature, and you can certainly see this at work at the moment.”