In Belgium, pension funds have traditionally taken an even-handed approach to the bond-equity split. And because they weighted their asset allocation neither heavily to debt nor to stocks, there were few changes to make when broader investment opinion came around to their way of thinking.

Since the crash at the beginning of the decade, pension funds in Belgium have not had to make the same level of shift as have UK funds, says Jan Longeval, chairman of the investment committee and CIO at Degroof Institutional Asset Management.

Whereas UK pension funds tended to have up to 80% of assets in equities, he says, the equity/bond split in Belgium has traditionally been more even. Ten to 15 years ago, Belgium funds tended to have between 35% and 40% of their assets in equities, whereas now this is only slightly higher at 50%.

In Belgium, the ‘compromise culture’ has turned investors away from high risk on the one hand, and conservatism on the other, says Longeval.

But though there have been only minor changes at the centre of asset allocation over the last two years, there have been alterations at the fringes. Property exposure, for example, has increased, says Hugo Clemeur, secretary general of the Belgian Association of Pension Institutions (BVPI).

“There is however a slow trend to increase real estate over the years,” he says, “the most likely reason being that real estate is considered to have a low correlation with other classes of assets - equity and bonds - and therefore form a meaningful diversification as well as a protection against inflation.”.

According to the BVPI’s financial survey over 2005, which related to 134 Belgian pension funds with total assets of €12bn - nearly 90% of the sector - the asset allocation end of 2005 was 44.2% in equity, 41.6% in bonds, 7.5% in real estate, 5% in liquidities and 1.7% in others.

Alternatives do not, on the whole, form a significant part of pension fund investments at the moment, he says. “As to the future, I see hardly any reason why the present allocation percentages would be consistently modified,” he says. “Belgian pension funds traditionally are very prudent and don’t swing their assets around. Changes if any take place very gradually and the overall tendency is to look at the very long term.”

Longeval says that investors both in and outside Belgium are now realising that old risk models such as standard normal deviation of returns, which has been a primary tool in investment management, have underestimated risk.

“There is a new science which shows that the risk of financial markets is much higher… so all risk models are flawed,” he says. “At the end of the day, many people in Belgium choose a medium-risk portfolio because, intuitively, it seems the best balanced situation,” he says. There is no great appetite for hedge funds, he says, partly because they are too technical and many people at corporations do not understand them. Not investing in something they do not understand is quite a healthy principle, he says.

Degroof Institutional Asset Management manages around a quarter of all Belgian pension fund assets, he says, and it does not invest in hedge funds for them. “We don’t really buy this message of high returns for low risk,” he says.

But Koen de Ryck, managing director of Pragma Consulting says that is his view, the way Belgian pension funds invest is affecting the returns they produce. “They should allocate more dynamically,” he says, suggesting tactical asset allocation, which some funds do use.

Though some Belgian pension funds, at least, are now investing more in real estate than they traditionally have, in a bid to chase after the good returns which have recently been seen in the asset class, others have modified their allocation to property. “Some, with already high positions in real estate have, however, decreased their allocation to this asset class,” says de Ryck.

Jos Verlinden, director of M&P Consult, says that most of the real estate investment done by pension funds in Belgium has been indirect rather than direct, mainly because most of the funds are small.

Real estate companies incorporated as SICAVs benefit from special tax status, he points out. However Verlinden predicts a rise in direct property investment. “We do expect that in future years there will be more direct investment because of (changes in) the tax situation,” he says.

But Xavier Timmermans, head of product specialist asset allocation at Fortis Investments in Brussels does not expect to see higher allocations to real estate. “On the contrary, Belgian pension funds seems to be worried by high valuations,” he says, and they are considering taking some profits. “They are seeking to diversify their mainly domestic real estate portfolios and look at new opportunities such as non-listed real estate - funds of private equity funds in real estate in Europe and in Asia,” he says.

Marcel Kunnen, relationship manager at Dexia Asset Management says the shift in allocation among Belgian pension funds away from the two main classical asset classes of European government bonds and world equities developed countries towards today’s more diversified mix happened in some cases without pension funds knowing.

“This change was set into motion by certain asset managers who started diversifying portfolios with investments outside of benchmark, often without the consent of the pension fund,” he says. The risk/return parameters that were the starting-point of many mandates were not respected anymore, he says

But over the past two years, pension funds have become more professional and now, at the start of many mandates, asset managers are given room to include these other asset classes outside the benchmark, but with very clear parameters being set as to maximum percentages.

The goal of this change in allocation is not to maximise returns at the cost of higher risk, but to stabilise returns in different market conditions, says Kunnen.

He predicts that liability-driven investment and asset liability management will become more and more important for Belgian funds. “Meanwhile we see a lot of interest in capital protection mechanisms through dynamic structured asset management, like dynamic portfolio insurance,” he says.

Timmermans also sees growing interest in global tactical asset allocation overlay