EUROPE - Inflation-linked bonds (ILBs) are the cheapest way for pension funds to hedge against inflation, Blue Sky Group has suggested.
Speaking during the recent IIR conference on risk management, Bruus-Jan Willemsen, the provider's fixed income manager, said Blue Sky's ILB portfolio has generated more than 10.3% on average over the last three years.
Blue Sky has €13.5bn of assets under management on behalf of the three large KLM pension funds and 10 other schemes.
Since 2008, Blue Sky has managed a €2.9bn ILB portfolio passively after it dropped an external manager due to "disappointing" results, according to Willemsen.
The global portfolio consists mostly of ILBs from France and the US, he said.
According to the manager, the current inflation level in the Netherlands is almost equal to the combined outcome of Bly Sky's global portfolio.
Willemsen also said he did not to expect to see hyperinflation in Europe, nor did he exclude the possibility of deflation in peripheral euro-zone countries.
For France - one of the largest issuers of long-term ILBs - he predicted 20% inflation over the next two decades.
Huub van Capelleveen, director at Cardano Risk Management, pointed out that the market for ILBs was limited and that inflation swaps were therefore a more widely available alternative.
During the conference, Hartwig Niersch, risk manager at the large metal scheme PMT, drew attention to the supervisory dilemma that additional legislation for derivatives against system risks was required, but that the effect of rules on risky behaviour was still unclear.
The resulting legislation, he said, might simply be a "stack of expensive rules".
He added: "Derivatives introduced news risks, such as liquidity risk and counterparty risk, that require increased insight and management because of the financial volatility of the markets."
In his opinion, derivatives should be applied not too often and in the right way, "like antibiotics".