Widening the net is the best way to fix it
Judge’s comment: “Very solid diversification management combining standard diversification in terms of assets, sectors, styles and dynamic monitoring”
The success of the Bosch Pensionsfonds (Bosch PF) in the diversification category lies in its dynamic and efficient fixed income allocation that involves a suite of mandates across the fixed income and which are managed both passively and actively.
The drive behind the recent diversification of its fixed income portfolio is a dynamic lifecycle concept to achieve an optimum balance between an ambitious, return-oriented investment strategy for employees up to the age of 55 and a capital preservation strategy for employees closer to retirement. Transition between the strategies occurs by gradually increasing the fixed income share from 42% to 70%. All Bosch PF’s fixed income exposure sits in a €1.8bn master fund, constituting the final element in a comprehensive approach.
With a risk framework designed to capture premia of every valuable asset class, Bosch PF’s fixed income strategy encompasses a wide range of investments with significant exposure to highly-rated government and covered bonds to create a 25% safety anchor, allocations to investment grade and high yield corporate bonds representing 55% and emerging market bonds accounting for the remaining 20%. The optimal and systematic use of liquidity and credit risk premia in this asset allocation contributes to Bosch PF’s sustained above-average results in a low interest rate environment.
Though the solid results are based on this broadly diversified strategy to minimise risk, it is not just the varied investments themselves that have contributed to the scheme weathering even the most extreme storms, as a mix of investment styles and approaches also play an important part. This means Bosch PF and its consultants are constantly looking for new investment ideas to ensure the fund can optimally tap into the full potential across all sectors and strategies within its master fund.
The most recent example came this year when Bosch PF commissioned the fiduciary manager to reassess the fixed income strategy with a view to managing the risk and uncovering return sources in today’s low interest rate environment. The result was a broadening of the security anchor segment, as historically low yields were beginning to put pressure on overall returns. The revised mandates added US government bonds at the expense of euro government and covered bonds. This mirrored a similar move in 2014 in the corporate bond portfolio. The remaining fixed income segments remained unchanged.
In terms of management style, Bosch PF’s active management combines a strategic asset allocation with tactical adjustments through systematic exploitation of market inefficiencies to generate additional returns. Furthermore, active management constitutes a vital part of the scheme’s overall risk management, which is intended to allow managers to identify and eliminate extreme risks at an early stage. The actual risk posed by active management itself is reduced by using multiple managers within each asset class. Bosch PF primarily employs passive management in efficient markets, for instance government and covered bonds. The combination of the two different approaches helps integrate active risk management with cost efficiency. All Bosch PF’s funds are managed externally using third party investment products or specialist investment managers.
The fund also offsets the risks and disadvantages of its core fixed income approach with absolute return strategies. The idea is to seek higher outperformance potential while mitigating the downside risk to a greater degree than a traditional benchmark oriented active fixed income approach could. Thus, Bosch PF’s absolute return strategies seek to deliver attractive risk-adjusted returns independent of market direction by investing in a broad range of fixed income securities without significant sector or instrument limitations. In addition to higher returns, they also help the scheme maintain the levels of liquidity, capital preservation and diversification benefits typically associated with a diversified fixed income portfolio.
Bosch Pensionsfonds AG
Founded in 2002
Defined contribution corporate fund
- active: 130,000
- retirees: 35,000
- one year: 9.5%
- three years: 11.9%
- five years: 9.0%
- ten years: 6.4%
- Highly diversified dynamic fixed income approach
- Combination of passive and active management
- Absolute return strategies in fixed income to offset downside risk of core bond portfolio
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