The recovery in peripheral government bonds in 2013 vindicated those pension funds that held on to their holdings through the euro crisis – explaining the notably better 2013 returns of the likes of ABP, which had not sold the periphery, over its counterparts that had done so. 

The driving factor in 2014 for Dutch pension fund returns was the strong downward trend in core euro-zone yields – from around 2% for the 10-year Bund at the end of 2013 to 0.5% at the end of 2014.

For those funds with high levels of hedging, this meant that simply sitting back and doing nothing has been a good strategy that has led to some spectacular returns – as high as 32% for the ING pension fund, 27.6% for Vervoer and 25.3% for the medical fund SPMS

Since these returns were driven by hedging positions, those with significant open positions lost out, and there has been some dispersion in the returns published so far. 

Some funds will have taken the decision some time ago to remove some strategic interest rate hedges, thinking that yields had touched their low point. Indeed, at many points over the past decade it has been possible to claim with conviction that rates are at historic lows. 

With yields now ultra-low at the start of 2015, it is easier to argue that there is little risk left in government bond holdings. But equally, no-one is talking about rate rises given Europe’s poor economic outlook. Wise funds are now thinking several years ahead, noting that unwinding large-scale euro government bond holdings, whenever rates eventually rise, will lead to huge liquidity shortages as other European institutional investors try to exit the same positions.

Roland van den Brink, former CIO of the PME pension fund, advises pension funds to start to think now about their exit route from government bond holdings – and to think about doing this together, rather than finding themselves trying to sell against each other in a market with no buyers. “For example, the 1994 limit-up crisis is legendary with capital gain losses of over 10% overnight. When the armageddon comes, London will not help us,” as van den Brink puts it. “We are all sitting in our cars driving into a big wall. It’s better to sit in a bus.”

So for many funds, last year’s returns were driven by risk management decisions, not by strategic asset allocations to the real economy. Trustees and investment committees are unsure which sources of return they should allocate capital to.

In the meantime, euro-zone QE has put the wind in the sails of equity markets. For many, the leading question at investment committee meetings is “where does this end?”.