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Fonditel reacts to daily market conditions

Fonditel is a pension fund management company (‘gestora’) that manages five pension funds, all of which are defined contribution structures. The company currently manages pensions for 71,500 people, representing 1% of the salaried workforce in the private sector and 14% of occupational pension schemes. Fonditel is a company dedicated exclusively to the management of pension schemes in Spain, with the peculiarity of being the only one in its class with a significant share base that isn’t owned by a financial or insurance group. The company’s basic principles are maintaining its independence, ensuring profitability and outstanding application of the best investment practices and services for its members and beneficiaries.
The Fonditel B pension fund was established in December 1996 with the aim of offering supplementary provision to the existing social security scheme for workers within the Telefonica group when the latter decided to segregate its activities within the telecommunications industry by creating different independent companies.
The pension fund of the employees of Telefonica Moviles de Espana SA provided the initial base scheme, into which other group schemes were incorporated creating a plan that today encompasses 24 different pension funds corresponding to different Telefonica group companies. The average workforce of these newly-found subsidiaries was young and so their retirement horizons relatively distant.
The fund’s investment policy was drafted jointly by the investment management team and the fund’s control commission to adopt a novel approach towards pensions management in Spain. The approach has proved to be immensely effective over the years.
The investment policy envisages an asset class split of 50% fixed income assets and 50% variable income assets. This distinctive strategy took the occupational pension fund market in Spain completely by surprise at the time it was implemented. Spain is a market that was much less governed by risk culture than its European counterparts.
More importantly the strategy includes a tactical allocation element that allows for a 25% swing either way from the 50% intermediate or balanced point in favour of one asset class. The decision to establish such broad tolerance limits was taken as a result of the fund’s capacity to assess its position on a daily basis and at market prices. The risk factor within this process is seen as another variable when looking at potential new investments for our portfolio, with volatility being measured on a daily basis and adjusted weekly according to VAR.
The tactical allocation policy allowed the fund during its first three years of trading to capitalise on the extraordinary performance of the equity markets.
During 1999, the management team began to detect symptoms that the equity markets as well as the valuations of listed companies were showing clear signs of over-valuation following almost a decade of high profitability. The fund believed it was time to change investment strategy. Investments in real estate and private equity, or capital risk, had been ruled out and the size of the fund meant that investment in property was not viable without taking on an excessive degree of concentration.
The fund finally decided to restructure its portfolio using a core-satellite model. The core was to be benchmarked as heavily against fixed income as equities and the satellites were to concentrate on strategies that could be implemented in the traditional financial markets using all the tools available to the scheme. The satellites were furthermore designed to generate returns with no link to systematic risk.
The implementation of such a system meant that Fonditel B needed to be capable of maintaining profitability levels and, more importantly, keeping the profit/risk ratio balanced during periods of extreme difficulty in the global markets. To this end, the fund applies a performance attribution system for asset classes that are valued externally by an international accounting consultancy. The development of the profit/risk ratio is monitored internally on a daily basis.
The above developments have seen the Fonditel B pension fund elevated to become an inescapable reference point within both the Spanish, and European, pension fund market.

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