Spain’s Fonditel pension fund has systematically found itself ranked among the best in its class with regard to profitability and has won important awards from financial publications in Spain such as Standard & Poor’s Expansion Award and Morning Star’s Internal Economy Award. Fonditel believes this is because of its asset management style based on a highly effective core/satellite model that is designed to add value and consistency and is endorsed by the modern portfolio management techniques that the fund is using.
Being a core/satellite model, Fonditel’s asset management policy means both the equities and fixed income elements at the heart of its investment portfolios are heavily benchmarked – rigorously tracked against their respective indices. Fonditel describes the management style of its core assets as “active management of passive indices”. This means the distribution and strategic under- and overweighting of the different assets at the core of the portfolios can be actively managed and the financial duration of the fixed income element with respect to interest rate expectations can be reduced. The fundamental indices Fonditel uses are the EuroStoxx-50 for equities and the JP Morgan EMU Fixed Income.
Fonditel believes its management style is innovative and unique among its counterparts in Spain, where passive management styles are most common for pension funds.
The satellites are active multi-management programmes that consume practically no capital, are managed in-house and are designed to produce positive returns with little correlation to the above indices.
The core, however, is heavily benchmarked. The fixed income portion tracks its index to the same extent the equities does and the core as a whole also tracks the satellites. Fonditel determines the weightings on each asset class depending on the way the main markets move and its investments develop. It uses investment strategies that rely on the traditional financial markets for the core assets and actively uses all the investment vehicles at its disposal. The satellites are designed to generate returns with little or no regard for what is known as systematic risk.
Fonditel says it divides its investments into two big groups of alpha generators: fixed income and equities. These are dependent on the markets where the investments, and therefore the returns, are made. The fixed income alpha generators include strategies based on the relative value between different bonds or curve yields, the relative value between the curves of different countries or block of countries and the credit differentials between bonds and other fixed income instruments, such as swaps.
The most common strategies for the equities alpha include the relative value between similar stocks, equities versus their sector, arbitrage, mergers and acquisitions and the relative value between equity indices and different countries.
Fonditel quotes figures issued by Inverco, the Spanish pension fund association, to highlight the success of its core-satellite management style. According to Inverco, Fonditel’s rate of return has consistently outperformed that of its private and occupational counterparts in Spain in the last five years. In 2003, Fonditel’s profitability reached 18.99% compared to 4.53% for private funds and 6.73% for occupational schemes. Similarly, it has outperformed the reference indices as well its own benchmarks in most cases over the same time period. Fonditel’s 18.99% compares favourably to the EuroStoxx-50 rate of 15.68%, JP Morgan EMU Fixed Income’s rate of 3.98% and the fund’s own benchmark return rate of 9.83%, figures again based on Inverco research.
Highlights and achievements
Fonditel’s core/satellite investment regime continues to see the fund ranked among the best in its class in Spain and as well as win awards from other prestigious economic and financial publications alongside IPE.
Designed to add value and consistency using the best techniques available, Fonditel’s superior returns and performance in the past five years compared with other Spanish pension funds, both private and occupational, are a testament to its commitment to an active management style that is uncommon in Spain. This is endorsed all the more by the fact it has also consistently outperformed its benchmarks and main indices over the same period, except in a few cases.
Keeping a close eye on the core assets by heavy index tracking whilst allowing the satellite investments to roam more freely has resulted in high profitability with both low correlation and costs as well as effective risk management. The ability systematically to alter the weightings of its core assets means the fund doesn’t have to worry about changes in the financial markets unduly.