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France’s ERAFP keeps its eye on portfolio diversification

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France’s ERAFP plans to further scale back the size of its fixed income portfolio this year in an extension of its diversification efforts, according to its latest annual report.

Under investment policy decisions adopted by the board in December last year, the €29.6bn pension fund should use this year to pursue the reduction of the bond allocation from 57% to 54% of the fund’s overall portfolio. New investments in bonds should prioritise corporate bonds, including emerging market debt.

According to its annual report for 2018, last year ERAFP cut the size of the fixed income portfolio from nearly 60% of assets to 56.6%, valued at amortised cost.

Another investment objective for 2019 is to grow the share of variable income assets from 32% to 33-34% of the portfolio, including an increase in private equity and infrastructure fund investments. Following a rule change in late 2018 ERAFP is now permitted to invest up to 5% of its assets in private equity and unlisted infrastructure, up from 3%.

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The pension fund has been investing more in real estate in recent years and the board indicated that it planned to raise the target allocation from 10% of assets to 11.5-12%.

As at the end of December 2017, 8.7% of ERAFP’s assets were allocated to real estate, also valued at amortised cost. Over the coming years the scheme’s allocation will shift so residential assets account for around one third of the real estate allocation, with a focus on rent-controlled housing for middle income households.

ERAFP is the compulsory top-up pension scheme for French public service employees, and its real estate policy includes helping its members with housing .

Across all asset classes ERAFP put an additional €2.1bn to work over the course of 2018. This included a €200m injection into a new foreign currency hedging portfolio, for which it awarded the mandate to Millennium Global earlier this year.

The remainder of the €2bn of fresh investments in 2018 spanned bonds (€377m), equities (€807m), “diversification” (€100m), private equity and infrastructure (€130m), and real estate (€550m), with less than 1% of flows accounted for by withdrawals from its money market funds.

The pension fund anticipates having at least €2.5bn to invest annually over the next few years.

According to ERAFP, in 2018 it financed the French economy in a broad sense to the tune of €11.9bn, equivalent to 46% of its total assets on an amortised cost basis.

Details and definitions: ERAFP reports on wide-ranging SRI policies 

Philippe Desfossés, ERAFP

Philippe Desfossés speaks at an IPE event

ERAFP has for years pursued and promoted socially responsible investing (SRI), which broadly speaking is an investment approach with an acknowledged social bent or objectives. The latest annual report gave no indication of this changing following the departure of Philippe Desfossés, its former CEO and a firm advocate of the approach, with particular emphasis on climate change and the implications for pension funds.

Writing in his first contribution to an ERAFP annual report, Desfossés’ successor Laurent Galzy said the pension fund was gradually evolving its investment allocation towards assets such as equities, real estate and infrastructure, which could deliver “a balanced long-term return” but also better contribute to financing the economy.

ERAFP would apply and deepen its SRI approach across all its priority asset classes, he said, and was equipping itself with new tools to do so.

The pension fund’s annual report included nearly 50 pages dedicated to its SRI approach, with the account structured in accordance with the recommendations set out in what is known as ‘Article 173 ’, France’s comply-or-explain requirements for ESG reporting by institutional investors. ERAFP said it also tried to implement the recommendations of the Task Force on Climate-related Financial Disclosures.

Multiple pages are dedicated to explaining the pension fund’s climate analysis methodology in general, as well as the results of its application to its bond and public equity portfolios.

This year it added three elements to its analysis and annual report: exposure to fossil fuels, the equivalent “temperature” of the portfolio, and the “carbon budget ratio”. ERAFP said that the results with regard to the latter two indicators needed to be interpreted with care as the underlying hypotheses and methodology could evolve.

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