The €8.1bn Hoogovens pension fund has largely implemented a new strategic investment plan introduced last year, increasing its stakes in equity, credit, and property at the expense of traditional fixed income.
In its annual report for 2016, the steelworks scheme said it had raised its equity allocation from 35% to 40%, while ramping up its credit holdings from 6% to 10%, based on an increased risk appetite among its members.
The fund said it was still in the process of increasing its combined property and infrastructure portfolio from 7% to 10%, with the process taking longer because of the asset class’ illiquid nature.
The annual report showed that the scheme was seeking a risk profile between those of fixed income and equity for its real estate allocation, and aimed for stable returns from direct property. It also said it was considering branching out into international property.
The pension fund of Hoogovens, part of Tata Steel, posted a net return of 8% in 2016.
Real estate generated 5.6%, an underperformance of 2.3 percentage points, making it the only asset class falling short of its benchmark.
Equity – a combination of passive and active management – returned 9.3%, an outperformance of 0.4 percentage points, with its internally managed portfolio outperforming by 3.8 percentage points.
Its fixed income holdings delivered 4.7%. This allocation consisted primarily of euro-denominated government bonds, covered bonds, and residential mortgages, which are primarily deployed as an interest rate hedge.
Hoogovens said it had introduced a new benchmark for the physical components of its fixed income portfolio based on Iboxx indices.
Jelle Beenen, the scheme’s CIO, explained that the pension fund wanted to improve its ability to compare the risk premium for government bonds and covered bonds with the markets.
Credit yielded 12.9%, with all high-yield managers producing a “significant” outperformance, according to the pension fund.
Hoogovens said it planned to invest in direct loan portfolios focused on European smaller companies. In addition, it issued two mandates for American bank loans.
The Pensioenfonds Hoogovens saw its asset management costs drop to 0.26% and its transaction costs remain stable at 0.08%.
It attributed the relatively low management costs in part to its internal asset management, and the fact that 50% of its equity holdings were passively managed. In addition, the scheme had limited stakes in complicated or illiquid investments.
Based on its funding of 106.5% of year-end, the board indicated that it may achieve a 50% indexation within five years. However, it also noted that the chances of ever granting a full inflation compensation in arrears – currently more than 13.5% – would be slim.
At April-end, the pension fund’s coverage ratio had increased to 112.1%.