Funds control core activity
Asset allocations across European pension funds vary enormously and equally diverse are the decision making processes behind the various strategic and tactical allocation policies. While some rely heavily on regular ALM studies by external consultants, others like to execute decisions internally and on a more fluid, ad hoc basis. Some emphasise tactical allocation and fine tuning, others opt for the long term strategic allocation, riding out any short term market fluctuations.
One fund running its own show is the Netherlands’s E150bn ABP fund for civil service pensions. According to Michel Meijs at ABP, strategic asset allocation is based on an internal asset liability study and decided by the fund’s board of governors. Strategy is reviewed every two years. Similarly, tactical allocation is set by an internal allocation committee that meets once a month. Their analysis and decision whether to change depends on changing circumstances but, within the risk profile set for each of the funds, the managers are able to fine tune their investments.
ABP has recently undergone a review of the allocation strategy although the results will not be made public until later this year. Changes are described by Meijs as undramatic, rather a logical continuation of the previous plans- an increase in the equity share and, in line with many European pension funds, a substantial increase in foreign investments.
At DIP, the E2.9bn Danish pension fund for engineers, the approach is relatively fluid. Head of investment Steen Villemoes and Soli Preuthun, who replaces him this month, say there’s an annual, internal memo describing the investment policy and the strategic framework. This is updated every year and presented to the board of trustees for approval. DIP has employed external consultants to help with the strategic allocation, two years ago it drafted consultants Wilshire to run an asset liability study, and it also employs analysts who carry out efficient frontier studies
Villemoes describes the strategic allocation as a guideline within which to stay; take the equity strategy, for example. Policy at the moment is to have an allocation of anywhere between 45% and 55% and within this framework, there are limits to the international weightings.Villemoes says the structure is flexible and, if there is significant change in the markets or on the economic front, then daily management at DIP can put a recommendation to the board with proposed adjustments to the guidelines. For instance, last year’s performance of equity markets was sufficient to push DIP’s holding above the prescribed limit of 45% and the fund decided to inform the board that the allocation should be increased. As it happens, DIP has since upped its limit to 55% and, at the moment, a proposal to raise the legal ceiling for Danish equities in pension funds to 70% is passing through parliament.
External managers are also subjected to investment restrictions, for example a specific tracking error. Again these individual mandates are monitored continually and subjected to an annual analysis, after which managers can fine tune as they see fit. Villemoes says this tends to be changed by the individual daily management rather than the board.
According to Bert Tibben, head of investment at the E1.6bn Ned-lloyd fund, its strategic allocation is around 35% in equities, 53% in bonds and 12% in property. For the bonds the strategic allocation is 90% within the Euro-zone while up to 10% can be invested outside the Euro-zone and, on the equities side, 10% is allocated to the Dutch market, 42% to pan-European countries, 35% to North America with the rest in Japan, the Far East and emerging markets.
Tibben says the fund’s board reviews strategic and technical allocation annually and meets quarterly to discuss tactical allocation. Tactical changes during the year tend to be relatively small. Tibben says despite the equity share remaining relatively stable, the share in Dutch equities has dropped significantly- before the euro, the share of Dutch equities was around 50% of the total equity allocation, its introduction has watered down the concept of a domestic market. Tibben says the allocation will change such that the share in the Dutch equities will probably disappear and find its way into the other European equities. Unlike DIP, the fund never uses external consultants.
The same applies to the Netherlands KPN fund which, according to Jan Willem Baan, prefers to carry out in house research. Trustees pick the strategic allocation and at present the fund has 58% in equities, 35% in fixed income and 7% in real estate. As is often the case, strategy is reviewed annually although Baan says the asset allocation is likely to remain unchanged in the near future.
In contrast, at the E3.2bn Belgacom pension fund, Strategic allocation is based on an asset liability study carried out by Dutch consultants ORTEC and the bond/equity split is determined directly by the findings. According to William Van Impe, the fund’s general manage, the last study was carried out a year ago and the fund is still rebalancing and upping its equity stake. Van Impe says the board of directors, comprising the management of Belgacom, shareholders and union representatives, take the findings of the study, decide whether to accept them, and then work out the means of implementing them.
Tactical allocation very a back seat role at the fund. “We don’t do tactical asset allocation,” says Van Impe emphatically. There are a few balanced mandates and those managers can allocate tactically to a limited extent but the fund is considering abandoning tactical allocation altogether. “It’s a very difficult discipline and, in our opinion, it is very hard to add value,” he says, adding “I don’t think we have to spend our risk budget on tactical asset alloca-tion…we are better spending our risk budget on our strategic allocation.”
Strategy is reviewed annually although this doesn’t necessarily mean a full asset liability study. This month, for example, the fund is set up for a limited review since the findings of the previous study probably still apply. Van Impe says the fund carries out a full analysis and ALM study every two to three years. Although the managers keep a close eye on market developments, in practice there is very little tinkering at the micro level and Van Impe stresses the outlook of the fund is long term. New money into the fund can be used to meet the strategic objectives.
Strategy at Sweden’s Sk220bn (e25.8bn) AMF fund fits the adage, if it ain’t broke don’t fix it. Sten Kottmeier, senior vice president, says it has a 50% allocation to equities of which half are Swedish, half foreign; 47% of the fund is in fixed income, the majority being in domestic bonds. Over the past 10 years the fund has tended to concentrate on few countries, few sectors and few companies, a strategy Kottmeier says has worked- AMF was, after all, the best performing fund in Sweden during the 1990s.
Asset allocation decisions have always been taken in house and Kottmeier believes this is one of the main reasons for the fund’s progress. There are four or five board meetings a year where they review performance and strategy but Kottmeier says the latter changes rarely. “We have a long term view…our strategic decision since the beginning of the nineties has been to have a high share in equities, both in Sweden and in the foreign market and that’s one of the factors behind our performance in the 1990s,” he says.
In addition, AMF has a strategic group in the financial department comprising the head of finance, and representatives from the fixed income, equity and real estate teams. This outfit meets weekly to monitor the fund’s strategy and is involved to a certain extent in the board meetings.
Tractebel, the E1.5bn fund of the Belgian power group is undergoing a rebalance at the beginning of this year and switching from a passive to active approach. According to senior financial adviser Alexander Pechovitch, the fund is looking for excess return and is convinced it will find it through a more active approach. It’s not a question of the old strategy being disappointing, rather the fund believes it will achieve a better excess return and a better approach to the risk return.
At the latest count, the fund held 50% in equities, 39% in bonds and 7.5% in property and cash. Of the equity share, 30% is held in the US, about 60% is held in pan-European equity and the rest is in emerging markets, Japan and East Asia. At Tractobel there is an investment committee that oversees strategy along with the portfolio management division and, according to Pechovitch, asset allocation tends to be an internal affair. That’s not to say it has never used external consultants- a few years ago Watson Wyatt carried out an ALM study. However, the decision to head towards a more active approach was made internally by the investment committee.