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Cyprus Hotel fund to add risk premia, private market assets

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Cyprus’ largest pension fund is diversifying the asset allocation of its portfolio by adding risk premia and private market strategies to its investment mix this year.

The €219m Cyprus Hotel Employees Provident Fund said it was in the process of evaluating potential providers.

Marinos Gialeli, the pension fund’s chief executive, told IPE: “Our existing hedge fund allocation consists of two multi-strategy funds-of-funds, which have done well for our fund over the years.”

However, he said there were two main problems with this approach: it meant two layers of fees, and a notice period for divestment of up to nine months.

“So we have decided to use [risk premia] to reduce our fees and give ourselves more flexibility for our tactical allocation moves and rebalancing when this is needed,” Gialeli said. “This will provide us with greater diversification of manager risk as well.”

Around 3% of the Nicosia-based Hotel Employees Provident Fund’s assets will be allocated to risk premia, according to the plan.

Private markets debut planned

The rationale for adding private equities and private lending assets was to spread risk and increase returns, the chief executive said.

“We have been very conservative with our approach which protected us in some of the most difficult times, but for many years have been discussing targeting a higher risk/return profile to meet the expectations of our members,” Gialeli explained.

“As the membership has matured and as we moved away from the culture of local assets and cash, we decided it was time to offer our members the opportunity to generate higher absolute returns while improving portfolio diversification.”

The pension fund was working to select funds-of-funds for private equity and has initiated the implementation programme, he said. The search for a private debt manager has also started.

The pension fund, which covers staff at 182 hotels on the island, plans to direct around 10% of its assets into private markets, with 4% going into private equity and 6% into private lending.

The fund’s strategy of asset diversification – which it has been working on for several years – has cut volatility significantly, Gialeli said.

The fund’s 5% return in 2017 was one of the highest produced by funds in Cyprus or on similar pension products offered by insurers, he added.

“We are comfortable with our exposures and our members have shown their support at the last AGM we had earlier this month,” he said.

Last year, the pension fund implemented the addition of two new asset categories in its portfolio – emerging market equities and European property.

This took the form of investment in two property funds – run by Encore+ and CBRE – and one emerging market fund with Lazard. Gialeli said all three funds had a good year for returns in 2017.

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