Constructing the perfect portfolio
Like many other pension schemes, the Complement Retraite Mutualiste fund (Corem) was seeking to match its long-term liabilities and reduce short-term volatility when it began operating in 2003. With the help of Mercer Investment Consulting, the pension scheme decided to employ a strategic asset allocation and created an internal division dedicated to asset/liability modelling. The pension scheme has allocated 70% of its assets to bonds and interest rate products (including cash), 15% to its stock portfolio, 5% to alternative investments (hedge funds) and 10% to real estate investments. This allocation has been determined through actuarial parameters such as tariffication, longevity, commercial development and appreciation of pensions.
The pension fund has come a long way since 2003, when it inherited a historical portfolio that was heavily weighted towards seven- to 10-year French government bonds and was managed using a classical buy-and-hold approach. Nowadays, Corem’s bond portfolio, which is looked after in-house, is very actively managed. In 2004, transactions with a value of €1,863m were carried out for a total portfolio size of €1,848m. The pension scheme invests mainly in corporate bonds rated strictly above BBB+. Currently, this represents 73% of the bond portfolio and the remaining 27% is invested in ultra-long government bonds (30 years-plus). The total financial return of the bond portfolio is 15.91% with an average yield to maturity of 5.66% and duration of 17 years. It is very diversified and includes all types of sector (including utilities, insurance, banks, TMTS, automotive, industrials), debt (both senior and subordinated) and product (such as plain vanilla fixed income, structured products and CDOs).
The stock portfolio and investment strategy have also undergone a radical change. At the end of March 2004, the scheme sold all of its former historical investments because it judged them to be poorly diversified and not in keeping with its performance, reporting or active management objectives. It then set up two dedicated funds of funds, UMR Select OCDE and UMR Select Europe, with the help of a multi-management company specialising in selecting funds. Corem says that it is very pleased with the flexibility, diversification and the financial performance delivered by these two dedicated funds of funds so far. Both of these vehicles are fed by over 35 different funds from all geographic areas, combining different styles of active stock picking from a broad range of asset managers. Corem has a total of €568m invested in UMR Select Europe and UMR Select OCDE, which last year returned 27.13% and 20.78% respectively.
Corem’s alternative investments are carried out via UMR Select Alternatif, a dedicated fund of hedge funds, which was created in October 2004. Corem took a gamble and risked reducing its absolute returns by investing €175m in this fund to reduce the overall volatility of its stock portfolio. UMR Select Alternatif is gradually investing in a number of diversified hedge funds and has an annualised financial performance of 4.67%.
Corem’s current real estate investment policy is also completely different to what was implemented in the past. The highly concentrated historical portfolio, which consisted mainly of Paris housing properties, has been swapped in favour of a more diversified portfolio. Corem has already sold the residential real estate properties it owned in Paris for more than €140m and is investing in commercial, logistic and office real estate properties in large continental European cities.
As part of a bid to make investments that will yield more, the pension fund is investing in specially created companies, alongside other large institutional investors that face similar challenges. This approach has been outsourced to IXIS AEW Europe, which has already reinvested €105m out of a total €219m of underlying assets.
Highlights and achievements
COREM was established in 2003 following a transfer of assets and liabilities from the former CREF pension system. Union Mutualiste Retraite (UMR) was created in 2002 to manage Corem’s assets and began operating in 2003. A performance low of 3.42% in 2002 led the new management to set an annual performance target of at least 5% net on assets. Net accounting performance was above target in 2003 (6.36% net) and in 2004 (7.34%). Net accounting performance in 2005 is also expected to be above 6% as well. This performance has been achieved through active asset management of all asset classes. In fact, Corem’s new approach to asset management has helped the pension scheme to increase the covered ratio of its pension fund from 81.5% at the end of 2003 to 90.2% at the end of 2004. (The net annualised return of the fund during the same period was 12.2%, but Corem has decided not to account for all of this performance.)