The German pension funds for church employees KZVK and VKPB have opted for a passive strategy in high yield, excluding the possibility to invest in exchange-traded funds (ETFs), senior portfolio manager Matthias Lange said at the Handelsblatt occupational pension forum that took place in Berlin this week.

The Kirchliche Zusatzversorgungskasse Rheinland-Westfalen (KZVK) and the Gemeinsamen Versorgungskasse für Pfarrer und Kirchenbeamte (VKPB) have switched to indexed products, partnering with Insight Investment and steering away from its active high-yield managers – which were not named – contracts which carried high costs to access the market segment, he added.

Moreover, according to Lange’s presentation, the pension funds’ active high-yield investments recorded a negative return of -80bps per year from 2010 to 2021, with almost half of the underperformance resulting from fixed costs.

“A peer analysis has also showed that we were not alone in what we observe [in terms of systematic underperformance],” he said, noting that “the benchmark seems very hard to beat”. Performance of the schemes’ high-yield investments has improved since implementing the passive strategy, he added.

The pension funds have also decided to exclude ETFs from their portfolio as the instruments do not replicate the relevant benchmarks and have high costs, Lange explained.

KZVK and VKPB have kept their allocation to equities stable over the years, at 33%, increasing investments instead in real assets, including real estate (10%) and private equity (9%), while 44% is invested in interest-bearing investments and 4% in cash.

Lange said that, as a long-term trend, the funds have had a fairly high allocation to equities over the years. “We systematically increase allocations to real assets, private equity and real estate, to capture the returns, illiquidity and complexity that these asset classes bring,” he noted.

The pension funds do not invest in hedge funds, total return products, infrastructure or private debt, he added during the event.

Assets under manager of both pension funds amount to €16bn, with an expected growth of 5% per year based on the current asset/liability management, Lange said.

Approximately 50% of total assets under management are managed through a Masterfonds – set up in 2010 – investing 30% in US equities, 22% in EU equities, 7% in equities in the Asia Pacific region, 10% in emerging market equities, and 5% in high-yield credit, among other asset classes.

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