GERMANY - Auto component maker Continental has confirmed it has invested all €300m in assets from a new external pension fund in exchange-traded funds (ETFs).
Continental created the external pension fund - a contractual trust arrangement - last July to finance €300m of its €875m in German pension liabilities.
Continental told IPE at the time that it had hired an external consultant to draw up an asset-liability study as part of the CTA's construction. It now says the consultant was the investment arm of HSBC Trinkaus & Burkhardt, a German private bank.
But instead of using external asset managers in implementing the CTA's asset allocation - the traditional method for German institutions - Continental decided to employ ETFs.
"We decided to invest in ETFs as we are not sure that the alpha (return above market return) which could be generated by using asset managers would be well above the managers' costs," Stefan Scholz, director of corporate finance, told IPE from Hanover.
Passive investment products, ETFs permit investors to assemble a low-cost portfolio covering a wide range of assets from international equities, through government and corporate bonds to commodities.
German investors like the transparency of getting a market return and the fact that fees are much lower than for actively managed funds. Other German pension funds known to have used ETF - albeit on a far lesser scale - include the €40m Chemie Pensionsfonds and the €5.3bn Höchster Pensionskasse, both of which insure employees in the chemical sector.
Scholz also said that by investing fully in ETFs, the firm was able to save additional costs related to using a Depotbank - which handles clearing and settlement - or a so-called master fund - which handles back-office administration.
"I would not, however, rule out using asset managers in the future, especially if we decide that the CTA should finance a greater volume of pension liabilities. No decisions, however, have been made on this," Scholz added.
According to Continental, it is using ETFs for equities and bonds only, with bonds slightly overweighted. It did not name the provider of its ETFs.
However, there was intense speculation in Frankfurt that the provider was Indexchange. Another major provider of the products in Germany is iShares, a unit of Barclays Global Investors.