European pension funds braced for crisis, shrug off market turmoil

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  • European pension funds braced for crisis, shrug off market turmoil

UK - European pension funds dismissed concerns about this week's volatile stock market, pointing to the use of derivative overlays and hedge options as a way of minimising risk in the current environment.

The reactions come as global stock markets fell drastically, with most eradicating all gains made in the past seven months on the back of fears over euro-zone debt problems spreading to Spain and Italy.

Rainer Jakubowski, board member and chief financial officer at Germany's BVV - the scheme for bank and other financial market employees - said investors should be used to stock market crashes by now.

"At BVV we certainly are, as we have protected ourselves with a derivative overlay since 2003," he told IPE. "We also reduced our equity exposure significantly in the past few weeks."

Henrik Gade Jepsen, CIO at Denmark's DKK476bn (€63.8bn) ATP, said the fund had divested from peripheral euro-zone bonds several years ago, instead opting for exposure to the country's own debt, as well as that of neighbouring Germany.

He insisted these had served as a "great diversifier" throughout the financial crisis.

He added that ATP's first response had not been to summon a board meeting and consult on changes to its investment strategy, which has been developed to withstand such turbulences.

"We hedge our liabilities fully - by hedging our liabilities, we have a strong protection of our solvency in situations like this, so that doesn't create any problems," he said.

"To protect us in those situations where our diversification strategy doesn't work, we still buy insurance against large losses in equities and other areas. That will also protect us if we see sustained drops in market prices. We are thus fairly well protected in a situation like this."

He explained that the scheme's "last line of defence" - in an instance where the above-mentioned strategies had proven ineffective - would be to call a board meeting reducing investment risk below a certain threshold.

Jakubowski explained that BVV, which has €22.2bn in assets under management, generally only employed a long-only approach when investing in volatile assets to minimise risk.

"For example our commodities investments shift between two pots," he said. "The one is a long-short pot, which is - or should be - market neutral.

"The long-only component had already been reduced to zero recently. You can see, the individual components have a downward protection."

This similar technique of using structured products comprising derivatives has also been adopted by the pension fund of Belgian bank Degroof.

Pension fund manager Jan Longeval said: "Nobody really anticipated this market slump, but there were already risks looming in the background.

"As a result, at the end of last year, we decided to use structured products for only a part of our equity portfolio as part of our strategy to create a certain risk profile and to protect ourselves against another potential slowdown."

In addition, the Belgian pension fund advised its customers to invest more in Greek corporate bonds and reduce their exposure to equities over time.

The pension fund, which allocates as much as 20% of its portfolio to Greek corporate bonds and 43% to equities, is also looking at several alternative products.

However, Longeval stressed that these products had to play on market volatility - as they are strongly uncorrelated to the equity market - and the pension fund therefore does not invest in hedge funds.

Meanwhile, Christian Böhm, chief executive at the €2.7bn APK Pensionskasse in Austria, stressed that his scheme's dynamic asset allocation allowed it to avoid the effects of "short-term market panic", while it had also divested from peripheral euro-zone states in favour of holdings in core countries, such as Germany, Austria and the Netherlands.

These "safe haven" states did offer benefits, but Böhm warned that investor interest could cause problems in future.

"Because of the relatively high number of investors fleeing to these safe haven countries, we have seen their bond prices increase on the back of demand," he said.

He said this could potentially expose investors with holdings in safe haven states to further risk as the bonds prices rose further.

Jakubowski noted that BVV had likely already enjoyed the rewards of rising bond prices and that this price increase had led to his scheme increasing in value over the past few days rather than decreasing.

However, he accepted that this increase was an exaggeration prompted by the current market environment.

"When I look at bond markets, specifically the euro-zone bond market, I notice that the safe bonds - including the German Bund - are too expensive," he said.

"The panic relating to Italy and Spain, in turn, results in a situation where yields are reflecting this panic. Both areas have seen exaggerations, but in the opposite direction.

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