Conservative approach

Management of pension funds in Spain is dominated by a few major financial institutions and insurance companies. The top three providers, BBVA, La Caixa and Santander manage 45% of total assets under management, while the top 10 represent three quarters of the market.
Santander’s asset management unit is one of the largest pension fund managers, or gestora, in Spain. At the end of 2003, according to figures published by Inverco, the Investment and Pension Funds Association, it had assets under management of E6.6bn which gave it a total share of the private pension market of 11.9%, placing it third.
Third pillar schemes represent nearly 87% of Santander’s business; at the end of last year it led this sector with a share of 18.3%.
Santander claims to be atypical of the traditionally conservative Spanish market. “Our investment approach is more aggressive than that of our competitors,” says Ernesto Gallardo, Santander’s director of private pension funds. “We invest more of our funds in equities than the market average.”
In 2003 Santander had just under 25% of funds invested in equities, which compares with a market average for second and third pillar schemes of 19%. Of the 25% over 80% was invested in foreign equities. Santander’s allocation to equities is almost back to the levels of 2000 and 2001 following a dip to 16.5% in 2002.
But the move back to equities has been slower because the performance of equities over the past few years has made the bank cautious. “But we think there will be a global recovery so we will increase the share of equities in our portfolio from next year,” says Gallardo. He adds: “Part of the reason for this is that interest rates remain so low.”
The company has responded to the very low interest rates delivered by public bonds. “Last year, with interest rates at 2%, we could not charge fees of 2.5%,” says Gallardo. “So we needed to generate more yield, and increased our investment in corporate bonds.” But corporate bonds still represent a small proportion of total assets: just under 3.7% at the end of last year compared with 3.1% a year earlier.
Meanwhile over 25% of its assets are liquid or invested in short term placements of up to three months compared with a market average of 20%.
Santander Asset Management invests in balanced funds, and it is only these that are managed directly by the pensions department. “We give mandates to other teams in the bank if they are particularly specialist in that area,” says Gallardo. “Examples of this are alternative investments. The more analysis something needs the more likely we are to delegate the management, but the management always remains in-house.”
If the mandate has been delegated to a team, then the decision is the responsibility of that team. The pension fund department takes the decision only in the case of the balanced funds which it manages directly. “However, the pension fund department deals with any problems that arise with the delegated mandates,” stresses Gallardo.
He adds: “We also provide performance objectives for each delegated mandate and assess performance in relation to the objectives on a regular basis.”
Somewhat smaller, with a total of E2.3bn of assets under management, is Caja Madrid Pensiones, which is part of the investment management division of the Caja Madrid bank.
As at the end of 2003 Caja Madrid Pensiones managed E2.3bn of pension fund assets, an 18.8% increase on the total a year earlier.
This increase was driven largely by growth in the third pillar business which accounts for 74% of the E2.3bn total assets.
The remaining 26% is invested in second pillar schemes. Of this amount, 90% is accounted for by the pension scheme for Caja Madrid employees.
In the year to September 2003, funds managed by Caja Madrid Pensiones generated returns between just under 1% for some of the mixed funds to 10.2% for one of the funds invested purely in equities. The largest fund, representing around a third of total assets and of which around two thirds is invested in fixed income returned just under 3.5%.
Overall the asset allocation of Caja Madrid Pensiones is very conservative, with only 9% of total assets invested in equities at the end of February, compared with double that figure three years earlier. The remainder is invested in fixed income which is exclusively Euro-zone to eliminate the currency risk.
Meanwhile the pension scheme for the employees of Caja Madrid is much less conservative, with over 35% invested in equities. The company explains that the asset allocation depends in part of the average age of the members.
The effect of recent losses suffered by Spaniards investing in equities is clear. “Last year we launched some guaranteed fixed income products in response to client demand following the turmoil on the stock market,” says Sebestian Redondo, director of the investment division of Caja Madrid.
“Real estate is an important asset class for us,” he continues. “We are looking for opportunities in this sector but now it is difficult because prices are very high.”
The company is also analysing the opportunity of hedge funds and may invest up to 10% of total assets in hedge funds. “We think they can reduce risk without reducing the return,” says Redondo.
He adds: “As for private equity we have a target to invest 2% of assets in six or seven funds over the next few years. We hope that the big institutions have the same problem and put pressure on the politicians to simplify the system.”

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