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Portuguese pension returns boosted by EM equity in Q1

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Asian and emerging market equity returns helped Portuguese occupational pension funds post a median return of 1.2% in the first quarter of 2017, according to Willis Towers Watson.

The gain lifted 12-month returns to 3.3% as at 31 March 2017, compared with an 1.8% return for the 2016 calendar year. Annualised returns for the three years to 31 March rose to 3.5%, and reached 5.1% for the five-year period.

Performance figures were submitted by so-called ‘closed’ funds, which are generally pension plans for a single employer or group of companies, and make up the vast bulk of occupational plans. The analysis used data covering around €13bn in assets, equal to 80% of the closed pension fund market in Portugal. It incorporated more than 100 pension funds, including the five biggest pension fund managers in the country.

José Marques, senior investment consultant at Willis Towers Watson, said: “Portuguese pension funds are materially reliant on the performance of global equities and euro-zone bonds, corporate and government. Although bonds had a relatively poor performance, equities performed well across most markets and continue to benefit from central bank liquidity.”

Marques added: “Directionally, Q1 2017 was very similar to Q4 2016, although in 2016 we saw bonds performing even more poorly as a result of markets adjusting expectations for inflation upwards, following the US election results.”

According to estimates from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP), covering 88% of the Portuguese pension fund market at end-March, investors had allocated 51.7% to bonds, 22.8% to equities, 13.1% to real estate and 2.5% to alternatives. Figures included both direct and indirect holdings.

Marques said the strongest equity returns came from Asia Pacific and emerging markets, which gained around 10%.

Euro-zone came in just below zero, Marques said, but “there were a few exceptions, notably Portuguese government bonds, where we saw low positive single digit returns, as we start to see improvements in the confidence of Portuguese economic recovery”.

Property returns in the euro-zone were also positive, with low single-digit returns over the quarter. Alternatives, such as hedge funds and commodities, performed well too, according to Marques. But crude oil had another very poor quarter, losing around 6%.

Marques said that many Portuguese funds were employing diversification not only as a risk management tool, but also as a way of obtaining a higher return.

He added: “In addition, pension funds tend to employ active management as a way of improving return rather than just tracking an index. This of course has the downside of exposing them to active risk as well.”

Marques concluded: “Some pension funds are looking to immunise their liabilities against movements in interest rates by buying assets that have a similar maturity profile as their liabilities. In general, we have seen a greater demand for asset-liability modelling studies which are fundamental for setting a robust investment strategy and risk management plan.”

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