The German operation automotive supplier Continental does not itself invest directly in exchange traded funds (ETFs). Instead the company, which showed around €1.9bn of pension plan assets in its 2006 annual report, established a fund under a contractual trust arrangement (CTA), called Continental Pension Trust in June 2006.

The initial CTA funding of €300m was invested in ETFs in the third quarter of 2006. A second allocation to the CTA, of €330m, was made at the end of 2006. It is still unclear what this tranche will be invested in, as Continental's asset-liability management (ALM) study is still under review but the company expects to make a decision before mid-year.

However, its 2006 ALM study included a forecast on pension obligations based mainly on defined contribution plans and the corresponding plan assets in its core regions of the US, Germany and the UK.

This global review of pension liabilities and asset allocations suggested that in Germany, Continental could benefit from less risk and a more bonds-orientated investment style.

But while a passive strategy was defined for Germany, the company wanted to continue its active mandates in the US and a combination of active and passive mandates in the UK. This then led to the foundation of the CTA and the ETF investments in Germany.

Continental has not identified its ETF provider.

"It is difficult for an asset manager to continually achieve a performance above the index in traditional asset classes and it is almost impossible in asset classes such as Euro-zone government bonds," says Stefan Scholz, head of finance and treasury at Continental. "As we have already been chasing alpha in the US and partially in the UK and still have a large number of equities in those countries, we decided to follow a passive strategy in Germany with the majority - more than 70% of the first allocation - invested in bonds via ETFs, while only a minority was invested in equity ETFs.

"The transparency and cost efficiency of ETFs initially aroused our curiosity. And we soon noticed that in the past there was hardly any tracking error between the ETF and the index performance, meaning the difference between the return of the index and the return of the ETF was very small and was caused by the ETF's total expense ratio."

He adds that Continental's bond ETFs are currently doing better and cost less than expected based on the total expense ratio.

To Continental, ETFs appeared to be a very cost-efficient solution due to the absence of a need for a global custodian and a master-fund, as data and prices are easily available and ETFs can be bought and sold like shares on the stock market.