Broadening investor horizons
Austrian funds have been active in introducing new features to improve performance and offer new options for investors.
“We launched a major project in the second quarter where we are using swaps to construct a portfolio with government yield but with much less interest rate sensitivity,” says Gunther Schiendl, head of investments at APK Pensionskasse. “We do not believe that there will be a substantial rise in interest rates, but if there is we have a ‘plan B’ which is to switch more of our investments to a variable coupon strategy.”
He adds: “In some of the plans we have implemented the new strategic asset allocation with 30% in equities, 30% to 40% in traditional fixed income and 30% to 40% in variable coupon strategy. Our equity allocation is about the same as the overall market; on the bonds side more of our peers seem to stick to a duration strategy in fixed coupon bonds. In our bond portfolios we have split between a fixed income strategy, ie a duration strategy and a variable coupon strategy.”
The amount of equity risk in APK’s plan portfolios is basically unchanged, but a discretionary market risk overlay strategy has been added.
“Over all the funds we have achieved a weighted average return of 7%,” says Schiendl.
He adds: “We try to remain focused: we do not believe in diversification for the sake of it. Clearly diversification has positive aspects but we are not going to every party that is on. You risk jumping late onto the bandwagon and buying markets that have become too expensive.”
Meanwhile, at another of Austria’s major pension funds, Vereinigte Pensionskasse, (VPK) the highlight of last year was a move into SRI, and specifically the investment in an SRI active managed global equity fund last July. “It has been very successful,” says Martin Cech, investment manager at VPK. “It has increased in size from e26m to e50m this year. In addition to that we have set up an index tracking sustainable equity fund and a euro-denominated bond fund on SRI lines.”
Another major event for VPK last year was the establishment of a new real estate fund in cooperation with a number of other institutional investors managed by Henderson Global Investors. The development of this fund has very successful this year, and Cech expects the total fund to be worth E350m by the end of 2005, of which VPK will account for around E30m. Currently the total fund has a value of around E120m.
In terms of its asset allocation VPK’s investment policy is nothing adventurous at present. Between 25-30% of the fund is invested in equities, of which around 90% are foreign. Nearly two-thirds of the fund is invested in bonds of which around 10% is accounted for by corporate bonds.
But changes are afoot. The fund plans to diversify its portfolio, mainly on the fixed income side as well as through alternative investments such as hedge funds. It will also take further steps in real estate.
“By the middle of this year the fund had returned 3.5% and will return 7.5% over the next twelve months,” says Cech. “We are cautious but quite optimistic for the rest of the year.”
Cech is also optimistic with regard to the development of the industry as a whole. “I think that over the next two years there will be a further gradual shift to second pillar funds,” he says. “A lot of small- and mid-cap companies in Austria have done very little about second pillar. Many of these companies are seeing the need for a pension plans; it’s a question of awareness.”
The level of awareness, at both a fund and population level, seems to be increasing. Discussions about reforms and preparations for the EU directive are ongoing; this also concerns the standardisation of the first pillar pension provisions. “This builds a high level of awareness of pension issues among a broad spectrum of the population,” says Schiendl.
He adds: “DB plan sponsors have become much more aware of risk, and some plan sponsors are considering major changes in their investment strategies to lower the level of risk in their schemes. Among DC schemes there is discussion that pension funds should offer their beneficiaries a choice between low and higher risk investment strategies. Today more people realise that there are risks in asset-based pension plans and that they may have to take some personal responsibility too.”
Schiendl notes that some pension funds want to change the specific roles they play in the pension fund value-chain: some want more competence in-house, some are sourcing out more parts of the investment management. APK is having more discussions with its sponsors and beneficiaries about strategy.
But it seems that not all the industry players have been contributing as much as they might to the discussion. “To be rather blunt, there has not been much input from the fund consultants, particularly during the downturn in the equity market,” says Schiendl.
He stresses that quality of service is becoming ever more important. “Competition to manage pension money has become more intense. There are seven multi-employer pension funds of which we are one. We have seen a lot of clients that have lost confidence in their pension fund managers because of poor performance and poor communication. We have been able to get a lot of new business from our competitors: that speaks for itself.”
The EU Pensions Directive is to be adopted by September 2005. This will require an amendment to the Austrian pension fund act, which will introduce the prudent man rule and more possibilities in terms of how funds can invest.
The amendment is still in the discussion phase. “From what I have heard there will be a stronger focus on risk management and monitoring,” says Schmoiger. “I see the planned changes as being very positive.”
Meanwhile, Cech at VPK notes that “on the regulatory side, the maximum that can be invested in hedge funds and private equity, alternative investments excluding real estate, is 5%. Maybe this should be increased to 10%.”
The asset allocation trends of the funds featured suggests that asset allocation among Austrian pension funds at a whole may be becoming more sophisticated. Schmoiger notes that “at a national level in Austria we have seen a move towards alternatives, real estate and a stronger differentiation in the interest segment, as well as the introduction of structured products.”
So a traditionally conservative market seems to be branching out into new, more sophisticated lines of business. Watch this space.