As the euro launch beckons, Austria's pension funds appear to be raring to go - ready for the switch of investment portfolios from a volatile and illiquid domestic market to the harbour of the expected Emu powerhouse.

But there are those in the market who believe the currency transition may not be the proposed pot of gold for Austrian funds in the short term, suggesting closer inspection of the investment rainbow at home could lead to greater riches.

Ferdinand Kernbauer, managing director of the Vienna-based BVP Pensionskassen, one of Austria's largest multi-employer funds with assets of over ATS6bn ($508.5m) for around 1,200 groups, says they are firmly eurobound: Any national sentiment has been bowled over by the prospect of strong euro investment, which we see as a fantastic opportunity for Austrian funds," he says.

BVP currently holds between 55-60%, depending on liability study fluctuations, in Austrian bonds, in accordance with Austrian law stipulating a minimum 50% bond benchmark.

Around 10-15% of the portfolio is in foreign bonds, with a prevalence in the hard currencies of Germany, France, Holland and Denmark.

In equities, BVP has 3-5% in the domestic market with the remainder in the US and UK.

The fund is currently in the process of computing its asset liability studies for 1999, compiling a series of risk/ return combinations before adopting a final investment strategy.

However, Kernbauer says the new benchmark is most likely to come out at around 55% in eurobonds, around 25% in euro equities and the rest in global equities, probably in the US and UK.

"You can see we are very optimistic about the future impact of the euro, and furthermore we believe that down the line the market itself will begin to develop enormously. We ex-pect, for example, to see more investment vehicles such as asset-backed securities within the next three years."

The ATS6bn pensionskasse of Verbund, Austria's largest electricity company and owner of the country's national grid, is another fund readying for the euro leap - but on a risk aversion agenda, for reasons of pension scheme transition.

The company currently has over 4,000 employees and 3,000 in the pension plan, but numbers are set to rise next year.

Franz Paulus, member of the board of trustees at Verbund Pensionskasse, explains: "In the past we had one class of contributions, but as the result of an ageing workforce we now have two separate pension funds being introduced at the beginning of next year in order to accommodate a new influx of fund members."

Paulus says an asset liability study has been made in preparation for this move, recommending a reduction in equity investment to cope with the expectant pay-outs, although he adds that the overall shift is very much eurobound.

"In the past we have always dipped under the 40% equity limit in Austrian law, holding about 30% stocks and 70% in various global bonds.

"We will now reduce our equity exposure to 25% with around 15% in the eurozone and 10% outside, but on the bonds side it will all be euro-denominated. The new fund will also increase the amounts of assets we are investing, with ATS8bn expected in the new year."

Johannes Ziegelbecker, chairman of the Vienna-based OEPAG multi-employer fund which has 15 separate investment divisions to manage a diverse range of company schemes, says that the euro switch will not be marked by an overall flurry of asset activity from their side.

He explains: "Each of our divisions has different asset allocation benchmarks to reflect the risk factors or the DB/DC differences of the schemes they manage. Of course there will be the general asset trend next year of ATS investment becoming euro-denominated, but the benchmarks will not really change."

Bond holdings will transfer entirely to the newcurrency, because the actual denomination makes little difference, he says. However, on the equities side there is debate as to what will transfer and what will remain in the domestic market.

"We will not increase our foreign equity holdings in the short term as a result of the euro, although I am sure we will in the long run because of the nullified risk. But the main reason is that I am very positive about the short to mid-term future of the Austrian market. Basically it did not follow the previous upward turn of other European markets and I believe there is attractive potential still to be gained from staying in. We even think other European investors will see this and come here, further reducing the vol-atility and giving even better returns.

"As a result we are not expecting an equity exodus come January next year."

Ziegelbecker offers a sample 1999 asset strategy of one of OEPAG's investment divisions as an example.

"One of our companies presently has a 22.5% combined Austrian and international equity exposure, which will remain unchanged. On the bonds side though, the current 65% Austrian bond and 12.5% non-Austrian gilts will become 67.5% in eurobonds and 10% outside the eurozone. But as I have said, in the long term I am certain we will embrace euro equities."

Kurt Ebner, actuary and member of the board at the Vienna-based Vereinigte Pensionskasse, a multi-em-ployer fund with 700 companies and assets of ATS6bn under management, confirms this more gradual euro/schilling transition.

"Undoubtedly, the euro will open up the market, but we are not going to be changing our asset allocation strategy per se, just shifting step by step into the new single currency."

Ebner explained that the fund currently holds 30% in equities, with 25% of this in the domestic market and the other 70% of the portfolio in Austrian bonds. Both sets of assets will move over time into Emu, although Ebner backs up the view of strong continued in-vestment opportunities in Austria post January 1999. "There are many well performing Austrian shares, particularly amongst small companies such as Wolford, the underwear manufacturers, and if you stock pick with care it is possible to hold an extremely high performing portfolio."

He continues: "On the bonds side I think the transfer will be slightly quicker, because country bonds Europe-wide are performing badly. For example, book levels may be stable but interest returns in Austria are down to 3.4% for a 10-year investment, and they're even lower in Germany , France and Italy."

In conclusion, Ebner states his belief that the euro transition must be handled with care by Austrian pension funds.

"The prospects do look very tempting, but it really is a question for managers to make sure they get what they need with a move to euro investment, because any rash decisions could miss out on good domestic investment possibilities, or just happen too quickly. As they say in English - you should learn to walk before you run.""

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