Given its innovative and efficient approach to building its portfolios, it’s no wonder Inarcassa continues to be one of Italy’s leading pension funds and has won the IPE Award 2005 for portfolio construction.

The objective behind the €3bn self-employed engineers’ and architects’ fund is generating maximum returns with minimum risk, which Inarcassa says is constantly reviewed.

Structuring a portfolio and controlling risk go hand in hand and Inarcassa employs a four-way approach comprising an efficient investment process, strategic and diversified asset allocation, careful selection of investment tools and methods, and the analysis and management of factors such as volatility, VAR, dividend yields, asset correlation, beta, returns, asset maturity, ratings, concentrations, duration and hypothetical defaults.

Add to that its strong commitment to governance and the fund believes it will excel in managing its assets. Its governance structure is also extensive and, apart from effective decision-making, includes constantly reviewed investment objectives to match its liabilities. In addition, Inarcassa says it gives its strategic asset allocation the level of attention it deserves to reflect its importance as a key element of its objectives. Inarcassa also makes sure that the resources needed to attract the best investment consultants and managers are always made available.

Once the managers and consultants are on board, Inarcassa ensures they fully understand the objectives of the mandates they have been awarded as well as their benchmarks and risk parameters.

Next, the fund is committed to measuring both the managers’ and consultants’ performance regularly in relation to that of the fund itself.


Leaving no stone unturned, Inarcassa says it has established a high level of transparency and communication vis-à-vis both its members and governing bodies.

Measuring performance is complex and Inarcassa believes it meets this challenge by using the most representative, replicable and transparent indices it can. These are total gross returns indices which Inarcassa claims are best, given the long-term nature of its investments.

Managing the exposure to the many different currencies in its portfolio and hedge funds is based on a tactical asset allocation strategy using a currency overlay model at the fund’s new depositary bank.

The next step was to introduce greater diversification and Inarcassa achieved this with a three-tier top-down methodology breaking the assets down at asset class level, sub-asset class level and thirdly among the sub-asset classes themselves.

It then added alternatives, inflation-linked and money-market funds because it believes their individual characteristics enhance the overall portfolio. This has resulted in an strategic asset allocation policy based on six asset classes: equities; fixed income; property; inflation-linked vehicles; alternatives, and cash. These are then divided into 13 sub-classes.

The latest additions to the portfolio are a global high-yield bonds fund and an emerging markets equity fund. Benchmarked respectively against the Merrill Lynch global high-yield unconstrained euro-hedged and MSCI EM currency gross indices, Inarcassa added these two sub-classes because it felt their low correlation with other asset classes coupled with their expected high return rates improved the portfolio’s diversity and efficiency. Inarcassa explains that high-yield bonds have a low correlation with equities and investment-grade markets, while emerging markets in the past 17 years have shown a 0.51% correlation with the S&P500, 0.48% with the MSCI Asia and 0.22% with the MSCI Europe and Middle East. Increasing its emerging market weightings has not only added diversity to the portfolio, but improved Inarcassa’s investment opportunities.

Looking at its alternatives, Inarcassa decided to remove hedge fund managers that are too highly correlated and not performing as well as some of their peers. To supplement this, they added private equity, commodities and volatility funds to the alternatives’ sub-classes.


Inarcaasa says it allocates a great deal of resources on the choice of best investment tool and the methods to implement its asset allocation. It uses direct and indirect, passive and active management styles. So-called efficient markets – US and UK fixed income, US, UK and European equities – are passively managed, whereas it prefers active management for less efficient markets, such as emerging markets equities, debt and high-yield investments.

To consolidate its strategic asset allocation, Inarcassa has created two new departments in its finance division. First up is an internal management team running the European equities, fixed income and inflation-linked funds.

Next is a dedicated team looking after the selection and control of external asset managers.

Two teams of two or three specialist euro, US and Pacific-rim consultants support the two departments. Each adviser is assigned a specific job, be it risk management, performance measurement or manager selection, to enhance the portfolio and avoid conflicts of interest.

Overall, taking all considerations into account and results from the past 18 months, Inarcassa’s portfolio construction model produced returns of 10.3% in 2004, with the internally-managed equity funds outperforming the MSCI Pan-European by 7.9% and MSCI World by 9.4%. It also believes its structure has enabled it to select the best independent external equity and fixed income managers.


Highlights and achievements

Some believe a less stringent investment approach, allowing managers freedom, can be better than one that is controlled. That may be true in a mature pension fund market, but in Italy’s young pensions arena, Inarcassa has exploited all areas and levels of the investment process to make sure it remains at the head.

By constantly reviewing its asset allocation policy in relation to a strict risk management process that is based on a seemingly endless set of factors, it can construct its portfolio with confidence and diversity to ensure its meets its main objective – to be able to cover its liabilities and offer its members full protection for their assets.