European pension funds are taking the recent global corrections in their stride, reports Rachel Oliver
If the Far East and Japan are too risky, and the US is too pricey, then Europe would appear to be the likely candidate for new flows of pension fund money, following the global stock market corrections which have forced funds to re-evaluate their international equity and bond positions. But Europe's pension funds are not in any particular rush to make drastic changes.
The European markets have held out relatively well, surprisingly enough," says Robert Clement investment manager of the Dfl6.7bn ($3.2bn) Unilever 'Progress' fund in Rotterdam. "The big problem at the moment is the Far East, not lastly the situation in Japan, where the banks are in a very difficult position. If stock markets come down further, that's the big issue for the coming weeks."
The fund predicted the correction earlier on in the year and didn't waste any time in making preparations. "We were of the opinion half way through the year that stock markets were a little bit ahead of themselves and that the reaction wasn't improbable" says Clement, "And so we took some profits and created some cash, especially during the third quarter of this year.
"We did some selling and we are keeping that money ready, especially if the Far Eastern markets go down further."
The Bfr11bn ($310m) Belgian pension fund CPM did not make any changes to its equity allocation but did in-crease its cash position from 1% to 10% until the end of the year, says Karel Stroobants, deputy director general who is also planning to execute the fund's passive tactical asset allocation programme to re-balance the portfolio.
"We are waiting in accordance with our manager who says that it is not yet the buying time. The principle is, we will do it, we will rebalance, we will put money in the market to come back to our 10% weighting, but we didn't want to execute it blindfold-ed, we said we will do it due to the exceptional circumstanc-es spread out between last month and the end of the year. We will not wait longer than the end of the year. So there is a little bit of market timing in accordance with the manager on that respect."
Geoff Singleton, who runs the £4.5bn ($7.2bn) Strathclyde pension, was confident in the face of adversity, making no asset alterations, save the adjustments which the fund's managers made "be-fore the slide".
"There is obviously a threat to other markets, coming from the Far East, but we think that we are already a little bit more liquid than other funds and therefore we wouldn't want to do any more at this stage. We think we perhaps have about 3% more cash than the average fund in the all funds universe."
Deputy executive director of the Nobel Foundation in Stockholm, Åke Alteus feels quite confident on the static state of the scheme's portfolio and was surprised at the panic reaction to the stock market trembles. "In a certain way I felt we had an overreaction to those days. Be-cause then they went up al-most as much as they went down, and to me it is a bit surprising for professionals to act this way."
"Even after this so-called correction , our portfolio in is still up 20% for the year. So with very low inflation, you still have 20% in real value terms, that's not too bad!"
The fund did not change its position in expectation of the correction. "We don't actually engage in timing and what is referred to as tactical asset allocation, not to a great ex-tent anyway. We think it is very hard to do the timing ef-fectively so we are long range."
However, expecting further volatility on a "slightly downaward trend", Nina Movin, head of equities with the Dkr48bn ($7.4bn) Danish scheme, PKA, is considering pulling out of the Far Eastern markets altogether in the new year. "We will not allocate money to South East Asia in 1998 ex Japan," she says. "And I don't think we will allocate to Japan either to be honest. Some people might do that based on the lower prices we see now. We think it's still too early days."
The only option she feels remaining is Europe and the US. "From our perspective we feel we are sort of forced into them all - core Europe, core US." Though both need to be treated carefully. "It is very much a stock picking en-vironment we have moved into, really."
The Sfr5bn ($3.4bn) Nes-tlé pension fund in Switzerland, took advantage of the correction, by purchasing a heavy amount of European equities "on the dips" which are now showing good profit gains, says John Gillbanks, European fund manager and head of Nestlé's internal in-vestment team.
"We had previously built up a little bit of cash so we had spent that on keeping the eq-uity allocation high as we lost money on equities obviously and then we switched a little bit of money into bonds."
He adds: "We still keep a reasonably aggressive equity allocation and they are still as they were previously weight-ed towards European equities, on both a strategic and tactical basis, as we see Japan having the worst of the problems, and the US as being the most expensive market."
Unilever's Clement is still expecting troubles ahead and is now concentrating on the fund's long term strategic expansion into Europe. "For technical reasons, another thing we have to handle for the coming years is our relatively high position in the Netherlands," he says, add-ing, "We are looking forward to becoming more of a pan-European portfolio. And that would imply that we sell and gradually lower our Dutch exposure and increase elsewhere in Europe, like Germany and the UK."
While the deflationary situation is a positive factor for both short and long term interest rates, the bond rates at the moment are "not particularly exciting", concludes Nestlé's Gillbanks, and as the fund has zero exposure to Japanese bonds anyway, viewing them as "ridiculously overvalued", the only real option for active investment lies in European equities. "We still believe there will be good growth in the developed world in particular Europe. We are not too worried on the European equity front, with the other proviso of what else do you do with your money?""