Spanish third-quarter pension fund returns continue upswing
Spain’s occupational pension funds continued their upswing in performance during the third quarter to post a 3.48% return over the 12 months to 30 September, according to the country’s Investment and Pension Fund Association (INVERCO).
This brings the average annualised returns for Spanish occupational funds to 4.52% for the three years to 30 September and 5.99% for the five years to that date.
INVERCO said: “The markets contributed in a very positive way to value generation for pension plan members, especially in July, when international exchanges achieved very positive returns.
“The outstanding performance came from those plans with a greater exposure to long-term fixed income.”
The 12-month performance to the end of June had been -0.49%, an improvement on the -3.33% for the 12 months to the end of March, largely caused by market instability in the first few months of the year.
According to David Cienfuegos, head of investment for Spain at Willis Towers Watson, the 12 months to March 2016 was probably the worst year-to-year period since 2011, so subsequent year-to-year results would benefit simply by excluding the market peak in March 2015.
Meanwhile, equity markets have rebounded from their March 2016 lows.
“In addition,” Cienfuegos said, “we’ve seen euro bond prices continue to rise, as yields collapsed to their lowest levels by the end of the third quarter of 2016. However, since then, yields have gone up, and that will probably hurt performance for corporate pension funds overexposed to traditional fixed income.”
He said some of Spain’s largest occupational pension funds had dramatically reduced their overall exposure to traditional fixed income, while incorporating US credit, high yield, securitised credit and loans to fight the current low-yield market environment.
“Alternative credit has been a clear trend in the market for the past few quarters, and we expect that to continue into 2017,” he said.
“Furthermore, absolute return-type strategies are clearly an area corporate pension funds in Spain are exploring to potentially protect their portfolio against a challenging market environment over the next few years.”
As of the end of September, total assets under management for the occupational pensions sector stood at €35.3bn, an increase of 0.9% over the past 12 months.
Total pension assets, including those in individual plans, have risen to €104.6bn, a 3% increase over the year.
For pension funds as a whole, the biggest single component of portfolios – 30.8% – is still invested in Spanish government bonds, though there has been a slight shift in the past quarter towards Spanish corporate bonds, which now form 18.3% of portfolios.
Fixed income investments overall, including non-domestic holdings, make up 57.6% of portfolios.
But equity allocations have slowly increased, to 23.7% of portfolios.
Meanwhile, Mercer’s Pension Investment Performance Service (PIPS) shows that non-euro-zone equities was the best-performing asset class over the 12 months to end-September, with a 13% return, compared with 0.7% for euro-zone equities and 4.9% for fixed income.
The overall return was 4.8% for the 12 months to the end of September, compared with 0.9% for the 12 months to the end of June.
Xavier Bellavista, principal at Mercer, said non-euro-zone equities had done well over the past year because the US and, in particular, emerging markets had done better than other regions, while Europe was the worst-performing equities market.
“Fixed income holdings have done well because they have a bias towards euro-zone government, and Spanish, fixed income,” he said. “These assets have benefited from falling interest rates.”
Bellavista said Spanish pension funds were continuing to diversify their asset allocation and, in particular, their fixed income assets to tackle the extremely low interest-rate environment.
“We have been recommending very prudent decisions to our clients,” he said.
“We think equities will generate reasonable returns, with the upside risk to earnings growth balanced by the upside risk to interest rates. For government bonds, there is further upside risk to yields, which are still exceptionally low in historic terms.”