How we run our money: Amonis

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Tom Mergaerts , CEO of Amonis, tells Carlo Svaluto Moreolo about the Belgian €2.1bn pension fund’s uncompromising investment philosophy

Amonis OFP, the €2bn healthcare pension fund, is among a breed of experienced and sophisticated Belgian institutional investors. It is the fourth-largest pension funds in Belgium and one of the oldest in the country, and probably in Europe. 

It was set up in 1967 and until 2001 it was known as VKG-CPM, the pension fund for doctors, dentists and pharmacists. The Amonis brand was established at the time to identify a new supplementary pension scheme for employees of the health sector.

Amonis is essentially an industry-wide scheme, although it is open to retail savers and other institutions. The organisation is classified as an OFP, a EU-compatible Belgian pension funding vehicle, but has set up a Belgian SICAV through which it invests part of the assets of the OFP. 

Until 2004, Amonis was a pure defined-benefit scheme. The scheme was closed to new entrants but liabilities still accrue. In 2014 the board decided to hedge the liabilities. The portfolio was split into a liability-matching and a growth-seeking portfolio. At the moment the liability-matching portfolio accounts for two thirds of the assets. The portfolio is managed through a liability-driven approach consisting of domestic and international cash bonds.

Global diversification is one of the main principles of Amonis’s investment philosophy. CEO Tom Mergaerts, who joined the organisation in 1999 as an actuary, explains: “We do not make macro calls. We invest globally, composing the portfolio according to the relative Sharpe ratio of asset classes and geographies. Our strategic asset allocation is relatively stable.”

Listed equity is the main building block of the return-seeking portfolio. The organisation has sought to maximise risk-adjusted returns by sub-dividing the portfolio in regional buckets. Mergaerts says: “We have a global allocation to large caps, which tend to be international businesses, and then we have focused regional allocations to small and mid cap stocks. We invest in small and mid caps in the US and Japan as well as Europe.

“Having a regional presence is absolutely essential. Managers must have feet on the ground and this is what we ask of them. This allows us to find returns from small and mid cap portfolios,” says Mergaerts. The CEO adds that the portfolio is slightly overweight small and mid caps. 

Regional presence is a particularly important requirement for the managers of Amonis’ emerging market portfolios, consisting of equity and debt.

“I have come to believe that investing in pure beta is impossible,” he says. “When one invests in a benchmark, one has to take into account management fees, custody fees and transaction costs. This makes passive investment almost an illusion.

“The evaluation is, of course, benchmark-based, but we increasingly ask our managers to be benchmark agnostic. We compare the net return against peer returns and cross-benchmark returns. Staying in line with the market and getting the cost of investment back is the minimum return level we require.” 

Amonis has developed a robust approach to manager selection and monitoring that has helped it achieve solid results – the fund’s average annual performance since 1995 is 6.6%.

Mergaerts explains: “When we search for managers, we start with a complex, standardised quantitative screening. Track record is one of many different parameters. The next stages, however, consist of a qualitative analysis and on-side due diligence. We want to understand how the company works in detail. When we hire a manager, we aim to squeeze them down to the bone. We require standard reporting on information ratio and other measures, but we also want an analysis of transaction costs and trading decisions.”

The organisation expects managers to stick religiously to the chosen strategy. Mergaerts says: “It is not necessarily about under-performance. It is about what we bought and what they delivered. If, for instance, we give out a low-volatility mandate, we expect them to protect the portfolio during periods of falling markets. We strictly monitor managers against their promises.”

The organisation’s investment strategy comprises a number of unusual features. Amonis sees potential in currency management to generate alpha, at least to an extent. The fund hedges all currency risk in both the liability-matching and return-seeking portfolio. Three managers are tasked with running currency overlay mandates.

“We have been doing it since 1997, and our experience is that currency management adds a little alpha, to the tune of about 20bps per year. But we see a significant reduction in risk. We do not allow our overlay managers to take leverage, since it is not a speculative strategy. However, they are free to make an active call on currencies with a hedging purpose,” Mergaerts says.

The fund’s portfolio is still mainly invested in liquid assets. Amonis has resisted the temptation to invest large portions of the portfolio in illiquid assets such as private equity, real estate and private debt. Mergaerts argues: “In non-listed markets, we see valuation as a problem. If we cannot value the assets ourselves, we will not necessarily trust someone else’s valuation, unless there is a market for valuing the assets.”

The fund does have a €3m allocation to private equity and it has recently launched a new portfolio of listed infrastructure, but for the time being it remains focused on liquid markets. “As a pension fund, we like transparency and clarity. Private markets may be profitable, but they are too opaque. I want to see what managers are doing.”

That said, the fund has a significant allocation to hedge funds. “We have created our own fund of funds, which includes long/short equity strategies but is tilted towards macro funds. Last year, when equity markets were down by 10%, the portfolio was delivering a 4% return,” he says.

The allocation to hedge funds was about 8% of total assets earlier this year. It was raised in recent months at the expense of the equity portfolio to reduce market risk. “It performs so well because we build the allocation internally and invest directly in individual funds.”

Like most European pension funds, Amonis has gradually implemented a responsible investment approach. This consists mainly of exclusions focused on tobacco and weapons producers, as well as companies that draw more than 30% of revenues from fossil fuels. Last year, the ESG policies were implemented across 85% of the portfolio. This year, the fund has worked to fill the gap. 

Last year was a difficult one from a returns perspective. The fund posted a 2.14% negative net return, owing to the poor performance of the growth portfolio and of the currency management strategy. In recent years Amonis has also seen significant outflows owing to a surge in retirees. This the result of new pension regulation, which since 2015 establishes that second-pillar pensions must be taken out at the same time as the state pension. 

Since the collapse of the government coalition in December 2018, Belgium has been run by a caretaker government led by prime minister Charles Michel. He resigned as a result of a dispute over the United Nation’s Global Compact for Migration and is now president-elect of the European Council, a post which he will assume in December. There were federal and regional elections in May but the negotiations to form a new federal government were ongoing as of October. 

International media pay little attention to Belgian politics, perhaps because of a sense that the country can manage without a government. The country endured an even longer period of political uncertainty between 2010 and 2011, surviving without a government for more than 500 days. 

Even without a government, the country’s lawmakers have made significant progress on the implementation IORP II. This was also thanks to the existing regulatory environment, which mirrored the European directive.

Belgium is hardly a source of drama in terms of pensions. The country was ranked 21st in this year’s Natixis Investment Managers’ Global Retirement index, having slipped three places from the 2018 ranking. The drop was due to factors including low interest rates, tax pressures, government indebtedness and old-age dependency. But it managed to beat neighbouring France, which was ranked 22nd. Neighbours Luxembourg, the Netherlands and Germany, were ranked 10th, 11th and 13th, respectively.   

Belgium’s relatively small pension sector receives little attention. Nevertheless, Belgium has become the country of choice for many multinationals setting up pan-European pension schemes. PensioPlus, the Belgian pension fund association, is hoping that assets in the country’s second-pillar system will grow to €100bn by 2025, largely thanks to pan-European schemes. 

If the association’s hopes become reality, pension assets would grow significantly from today’s level. According to IPE’s Top 1000 ranking, Belgian pension funds managed €27.1bn at the end of 2018. The institutional investment sector will certainly become more robust and dynamic as a result of such growth. 

In 2017, the number of pensions taken out nearly doubled over the previous year, and pensions paid grew nearly 80% to almost €100m. In 2018, more than €87m was paid. However, the fund’s coverage ratio was over 106% at the end of last year.

To cope with these pressures, over the years Amonis has developed a robust risk-management strategy. The fund applies a risk factor-based monitoring approach to the whole portfolio. This consists of an integrated asset-liability factor decomposition process, whereby the factor risk attribution is measured on both the asset and the liability side, to check for risk factor mismatches between both sides. Thanks to this approach, management obtains a measure of surplus-at-risk that is used to inform asset allocation decisions. The strategy earned Amonis the risk management award at last year’s IPE Awards in Dublin.

Diversification also remains among the fund’s main defences against market stress. Mergaerts says the portfolio is well-diversified, which should allow it to continue to deliver returns and withstand future shocks. “The main discussion will be whether will we invest more or less in alternatives like hedge funds,” he says.