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IPE special report May 2018

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Equities boost Spanish pension fund returns in Q1

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Strong first-quarter performance from global equity markets boosted the average return from Spain’s occupational pension funds to 5.6% for the 12 months to end-March 2017, according to the country’s Investment and Pension Fund Association (INVERCO).

This compared with a 2.7% return for the calendar year 2016, and a 3.3% loss for the 12 months to end-March 2016.

It brings the average annualised returns for Spanish occupational funds to 4.1% for the three years to 31 March 2017, and 5.3% for the five years to that date.

While equity portfolios made large gains over the first quarter, fixed income experienced a slight correction, said INVERCO.

Preliminary estimates from Mercer’s Pension Investment Performance Service (PIPS) showed that, for the three months to end-March, euro-zone equities made 6.8%, non-euro-zone equities added 5.1%, and fixed income lost 0.3%, giving an overall total return of 1.4%.

For the 12 months to the same date, returns were 17.9% for euro-zone equities, 24.8% for non-euro-zone equities, and 1% for fixed income. The overall return was 6.1%.

The PIPS survey covered a large sample of pension funds, most of them occupational schemes.

INVERCO’s figures showed that, for Spanish pension funds as a whole, the average allocation to domestic assets remained stable, forming 57.4% of portfolios at end-March. Non-domestic assets grew from 26.3% at end-December 2016 to 28.5% three months later.

Over the same three months, allocations to fixed income decreased slightly to 53.6% on average, while equities rose to 29.4%.

The shifts in geographical and asset class weightings were both partly explained by the outperformance of global stock markets over the period.

Spanish government bonds still made up the biggest single component of pension fund portfolios at 27.8%, with a further 16% in domestic corporate bonds.

At the end of March, total assets under management for the Spanish occupational pensions sector stood at €35.6bn, an increase of 1.8% over the past year. The number of participants in the occupational system was just over 2m.

David Cienfuegos, head of investment, Spain, at Willis Towers Watson (WTW), said: “Large pension funds in Spain have implemented some of the strategic decisions they had made by the year-end during Q1 2017. So portfolio allocations have shifted towards alternative credit and more globally diversified bond portfolios.”

He continued: “In our experience, large pension funds in Spain are focusing on diversifying away from ‘dead assets’ – balance sheet assets with no value – and that has created a trend towards large exposures to foreign assets, outside core euro-zone bonds. US [government bonds] and corporates as well as global high-yield bonds are probably the big winners over the past few months, which obviously represents a continuation of the trend we saw in 2016.” 

Cienfuegos said WTW had observed increased allocations to loans and emerging market debt, with investors in yield-hunting mode – although they had not massively re-engineering their overall strategic asset allocation.

Spanish pension funds were continuing to push for higher allocations in private markets, particularly private equity, Cienfuegos added.

He said: “We expect large pension funds will continue to build their private markets portfolio, increasing their scope to invest, particularly in infrastructure and real estate opportunities. Furthermore, we expect them to explore how portfolio construction can benefit from the use of liquid alternatives – diversifiers – replacing some of the ‘dead assets’ in 2017.”

Meanwhile, a report from the Banco de España has warned that Spain cannot maintain current replacement rates for its state pension payments without a considerable increase in revenues. It said new funding sources would be needed since social security contributions are already high.

The alternative would be to reduce replacement rates, either by cutting initial pensions or changing indexation, in which case the role of insurance and other savings mechanisms in supplementing the public system should be properly defined, the report said.

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