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Impact Investing

IPE special report May 2018

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Big German schemes to avoid new linkers

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GERMANY – BVV, Germany’s largest Pensionskasse or traditional pension fund, has no immediate plans to buy the new inflation-linked bonds to be issued by the German government from next week.

Frank Egermann, head of portfolio management at the BVV, told IPE that the fund’s massive €17.7bn portfolio was already implicitly protected against inflation via its investments in equities and real estate.

“There is no question German pension funds will consider investing in the bonds as they offer long-term protection against inflation,” Egermann said.

“While we in the past had the bonds (from non-German issuers) in our portfolio, we currently do not rely on them owing to the at present sufficient inflation protection provided by our equity and real estate investments,” he added.

BVV, which serves the German financial services industry, currently invests 84% of its €17.7bn in assets in fixed income, 4% of which are corporate bonds. Another 11% is invested in equities, while 4% is allocated to real estate and 1% to alternative investments like hedge funds. There is no exposure to private equity.

Egermann said another important hindrance to buying inflation-linked bonds was the fact that they were currently relatively expensive compared with normal government debt.

He also agreed that the use of derivatives, a strategy employed by Nordrheinische Ärtzeversorgung (NAEV), the €7.5bn pension fund for physicians, was another effective way of protecting one’s portfolio from inflation. “But again, we don’t currently have need for derivatives,” Egermann said.

Meanwhile, the VBL, a €10bn pension fund for German public sector employees, said that initially, it would not be investing in German inflation-linked bonds. “Nothing is planned right now, but of course we cannot rule it out for the future,” VBL spokesman Percy Bischoff said.

BVV and VBL are not the only big German pension funds for whom inflation-linked bonds are currently not relevant. Others include NAEV and Bayerische Versorgungskammer, Germany’s largest pension fund with €32bn in assets.

Last December, when news of the German linkers broke, the BVK said the bonds were currently not very interesting from an interest rate perspective, though it added that this might change.

Professor Dirk Lepelmeier, managing director of NAEV, also told IPE that his fund preferred to combat inflation by “investing in real estate, which accounts for 15% of our assets and raising our exposure to commodities via futures”. Commodities could account for 3% of NAEV’s assets by the end of 2006.

Yesterday, the German finance ministry confirmed that next week, it would issue €5.5bn worth of euro-denominated inflation-linked bonds with a maturity of 10 years.

Ultimately, the finance ministry aims to sell between €10bn-€15bn worth of the bonds. Bookrunners for the bond sale are ABN Amro, Barclays Capital, BNP Paribas and Deutsche Bank.

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