Rachel Fixsen finds a conservative market uncertain on reform

Austria's pension fund managers are now freer than ever to invest in foreign stock markets, in the wake of the government's relaxation of investment restrictions at the beginning of this year. But many funds are having trouble shaking off the country's conservative investment culture, and managers still cling to heavy domestic government bond holdings.

On 1 January, paragraph 25 of the Pension Fund Act, governing investment requirements, was liberalised. Now a minimum of 40% of a pension fund's assets must be in Austrian securities, compared with at least 50% before the change. Forty per cent of the asset mix can be in shares, up from 30%, and total foreign investment can now account for up to 45% of the fund, after 25% previously.

I would say there has been a bit of a reluctant reaction to this," says Dieter Oppermann, consulting actuary at consultancy Herbert E G Hoefer. "Austria is conservative."

Most multi-employer pension funds have a very conservative strategy, with between 60 and 70% of their assets lodged in domestic bonds and the rest in foreign bonds and stock, says Martin Haschke, chief financial officer of Winterthur and its consultancy arm Wintisa. "Some of the single employer funds, such as IBM and Shell, as they are very international, actually have the maximum in foreign currency and the maximum in equities."

Richard Schwarz, managing director of IBM's pension fund, says the fund is already invested up to the limits of allowed foreign and equities holdings.

In Austria, pension funds are Pensionskassen, which are incorporated as joint-stock companies, rather than being funds in the Anglo-Saxon sense. But from an investment point of view they function in exactly the same way as funds.

When Austrian funds do buy stocks abroad, Germany and the Netherlands are their first port of call. Denmark and other European bourses come next in order of popularity, then the UK and France, and to a lesser extent the US and Japan are targeted. This means there is often little need for currency hedging, which can be costly. Only dollar and yen holdings would generally be hedged, Haschke says.

Pension funds in Austria would like to have a more aggressive strategy than they do at the moment, but they are up against the country's conservative investment culture. Investors are unhappy about accepting even short-term downturns, Haschke says.

Things are likely to change, though. "I think more and more we will be invested in equities, now that the investment regulations have been liberalised," says Fritz Janda, managing director of the Austrian Pension Funds Association.

According to the association, at the end of 1995, 12.9% of pension fund assets in Austria were invested in equities. Foreign equities accounted for most of that at 10.5%. Fixed-income investments took up a massive 70.6%, with 59.5% domestic. Domestic property accounted for 0.8%, and cash insured term placements, mostly Austrian, accounted for 10.9% of the asset mix. Superior long-term returns are the spur to the probable increase in equities investment, Janda says.

But pension funds need to be free to invest abroad if they are to achieve higher stock weightings, because the Austrian market is simply too small to accommodate them. "If all Austrian pension funds had large transactions, they would drive the market," says Haschke. "What Austrian pension funds could do to the Austrian stock market, in America would be called insider trading!"



On the Austrian bourse, there are only 15 really active stocks. In general, investing in Austrian shares carries a higher risk and provides lower performance than foreign stocks. Performance normally lags international markets by about 2%, Haschke says.

In 1996, international equities was the best performing asset class for Austrian pension funds, according to Swiss asset managers Pictet & Cie. The average return was 22.15%, although this was mainly due to the currency effect of a weaker Austrian Schilling. Domestic stocks produced a 12.89% return.

Overall returns for last year were 8.98% and 10.25% respectively for Pictet's two theoretical portfolios, Austria Pensionskassen Performance Indexes (APPI) 1 and 2.

Over the past six years, pension fund performance in Austria has probably not suffered as a result of heavy bond weightings at the expense of equities. "Bond markets were very good over this period and funds would have been hit very hard by downturns in equities. But for pension funds, this is still seen as short-term," Haschke says. In a 30-year period, performance would be better with heavier stock weightings, he adds.

Haschke says Wintisa is going to try to run a slightly more aggressive portfolio in future: "Our investment adviser is CSFB. They think in international terms which would normally mean 100% in equities."

Two German pension providers are coming into the market soon, and they too are expected to adopt a more aggressive strategy than is the norm. This should help shift investment patterns, Haschke says.

Pension managers in Austria are happy with the new regulations governing investment, at least for now. Nothing in the law is likely to change for at least three years, Haschke says, though pressure from the investment community will probably build up in the next five years or so.

IBM's Schwarz says there is no pressure for further change at the moment. "That was a very good negotiation result, and once you have this you should keep quiet, at least for some time. We are pretty happy with the new law."

In any case, legislation restricting foreign currency investment for pension funds may become irrelevant in time. The imminent arrival of the European single currency, and the prospect of Austria's eventual participation in it, pushes the foreign currency issue into the background longer term. Pension fund managers may wait and see when the Euro is likely to replace the Schilling before lobbying for more changes in Austria's laws.

Rachel Fixsen is a freelance journalist"

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