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Q3 Returns: China volatility hits Europe’s funds

Volatile equity markets caused third-quarter losses for most of Europe’s pension funds, as fears over China’s economy spread.

Investors were affected across Europe, from the continent’s largest asset owner, the Norwegian Government Pension Fund Global, to Latvia’s small but growing second-pillar system. 

The Norwegian sovereign fund’s equity losses resulted in an overall decline of 4.9%, despite fixed income and property – accounting for 37.5% and 3% of its NOK77trn (€731bn) in assets – returning 0.9% and -3%, respectively.  

Yngve Slyngstad, Norges Bank Investment Management’s chief executive, played down the NOK273bn losses, the fund’s second consecutive quarterly loss. “We have to expect fluctuations in the value of the fund when there are large movements in the market,” he said. “With the fund as big as it is today, this can have a considerable impact in the short term.”

Denmark’s ATP saw its losses limited to -0.2% over the third quarter, declining DKK200m (€26.8m) in value, and losing DKK500m as a result of its hedging activities. However, chief executive Carsten Stendevad stressed the “robust” nature of the fund’s portfolio. On a year-to-date basis, it achieved an 11.7% return.

In the Netherlands, coverage ratios fell in line with equity losses. The three schemes for airline KLM suffered quarterly losses of up to 4.1%, as was the case with the €2.5bn cabin crew fund, which also saw coverage decline by 3.3 percentage points. The general employees fund recorded losses of 3.8%, while the scheme for pilots retained the best coverage ratio, at more than 123%, despite losses of -3.9%, triggering a dip in coverage of 1.8 percentage points. Other large corporate funds recorded losses, including the Unilever fund Progress which lost 6.5%, while industry-wide transport fund Vervoer saw its quarterly loss of 1.1% translate to a year-to-date decline of 2.2%.

Some of the country’s largest pension providers fared marginally better, achieving overall positive returns in the case of the civil service scheme ABP and metal workers fund PME, which achieved results of 0.8% and 0.5%, respectively.  

According to Niina Bergring, investment director at Finland’s Veritas, investors should get used to increasing volatility. “The fluctuations are due to the fact the market’s microstructure has fundamentally changed with increasing digitisation,” she argued. The fund’s interim figures showed its year-to-date returns drop to 2.4%, partially down to a loss on fixed income holdings. Veritas, unlike other investors, was able to avoid equity losses. 

Varma warned that the Finnish government needed with face up to the challenge of stimulating domestic growth, as it said its year-to-date returns had fallen to 1.1%, compared with 6.1% for the same period in 2014. Risto Murto, president and chief executive at the pensions insurer, said: “The government faces the challenge of balancing the public economy while creating conditions for growth.”

Ilmarinen similarly saw its returns decline to just 3.1%, down from 5.7% for the first nine months of 2014. But it reported positive results across its entire portfolio – albeit with fixed income only returning 0.1% over the third quarter, and equity results falling from 8% to 3.7% compared with 2014.

Neither were Baltic funds spared, as Lithuania’s second pillar saw average losses of 4.2%, and losses as high as 9% for the higher-risk investment options able to commit wholly to equities. 

Latvia’s second pillar fared better, as all three investment options – equity-weighted, balanced and conservative – managed to return at least 0%, and up to 0.75% on average. But the system-wide average of 0.28% in the third quarter was markedly down from 9.5% in the three months to March and down from the 2.7% returned during the second quarter. 

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