Founded in 1990, the Vienna-based Vereinigte Pensionskasse (VPK) is the largest multi-employer pension fund in Austria with 95,000 members and €2bn under management. The basis for its balanced portfolio management strategy lies in its strategic asset allocation and benchmarks for each portfolio. Moreover, alongside absolute weightings, the fund defines bands for maximum over- and underweightings for each asset class in its portfolios.
Achieving its balanced portfolio objectives involves two steps. Firstly, investments are made on the basis of the overall portfolio. VPK says this demonstrates the well-diversified character of its strategic asset allocation. The second step sees the fund’s established and successful multi-manager multi-style concept come into play for each of the predefined asset classes making up the portfolio. The strategic asset allocation comprises four asset class groups – global equities, absolute returns, euro bonds and corporate bonds – which themselves are split according to style and type.
The global equities form the alpha equities investment group and include fundamental traditional and bottom-up styles, quantitative enhanced index style, sustainable and socially responsible styles and Austrian fundamental equities. The absolute returns (positive returns investments) class is made up of various bonds and loans, hedge funds of funds and real estate. The euro bonds class forms the core investment group and is based on fundamental, quantitative technical, index-tracking and sustainable and socially responsible styles whilst the corporate bonds are spread products and include fundamental manager styles.
VPK says it selects benchmarks for its asset classes based on their liquidity and mutual comparability. For the euro bonds core investment group the benchmark is the JP Morgan Government Bond EMU > 1 year. For global corporate and investment-grade bonds, VPK uses the Merrill Lynch Global Broad Market Index euro-hedged index. The managers’ focus here should be based on deep research-driven portfolio management and they are free to a certain extent to expose their investments ‘off-benchmark’ to areas such as high yield, convertible bonds and preferred securities.
The only benchmark used for the global equities is the MSCI World Equities unhedged. This is in preference to smaller regional or capitalisation indices and the investment managers in this class are not over restricted in their investment decisions, their main objective being simply to outperform the benchmark.
VPK chose Brandes, WP Stewart, Wellington, Alliance Bernstein, all US-based investment houses, and one German firm, DEKA, as its asset managers. VPK says the choice reflects the high international standing of each of the companies. Following a portfolio optimisation process, each manager was allocated 20% of the funds within each asset class and the same benchmark.
VPK says the results endorse the superiority of its concept in all market conditions, with the benchmarks thus far being outperformed at portfolio level each year since implementation. VPK believes the main reason for the outperformance is the use of different managers in each market condition. Furthermore, using localised investment strategies has led to an optimum investment mix for long-term investors. Overall, the mix of managers and investment strategies is leading to a general improvement in the risk/earnings ratio, enhanced protection in negative market conditions through the benchmark-free strategy of the bottom-up managers and enhanced performance competition between managers and their strategies.
The equity element of VPK’s balanced portfolio management is enhanced by a strategic 2% that is usually allocated to Austrian equities and managed in-house. VPK says it undertakes managing this element itself thanks to its know-how in certain niche markets and in accordance with client needs. VPK says this mandate has significantly outperformed the global equity markets since 2001. Moreover, VPK has already begun investing in an internally managed global SRI equity fund that is outperforming the global markets with impressively low volatility.
The absolute return class does not necessarily track or attempt to outperform any benchmarks but rather seeks to ensure stable positive returns. This includes an internal absolute return bond fund, ‘hold-to-maturity’ bond and loan investments and alternatives such as hedge funds and real estate.
VPK developed an ‘indicator system’ in 2001 to support its tactical asset allocation. This is essentially based on several fundamentals as well as certain psychological and technical factors. It is produced on a weekly basis so VPK can assess the relative attractiveness of the stock markets vis-à-vis the money and fixed income markets. VPK says the indicator system is a useful input tool in its tactical asset allocation.
Highlights and achievements
VPK’s carefully constructed balanced portfolio, based on a wide range of asset classes and weightings, has consistently outperformed the benchmarks it tracks since the fund started investing. The use of different managers for each different market condition lies at the heart of this success. This has been further endorsed by the use of localised investment strategies that give the best investment mix for its long-term investors. Furthermore, VPK’s policy overall is leading to a general improvement in its overall risk/return ratio.
VPK’s decision to manage a strategic Austrian equities mandate in house alongside a global SRI fund with impressively low volatility is further evidence the fund has produced an investment strategy whose balanced nature will ensure it will continue to outperform its markets and benchmarks, whilst its balanced alternatives portfolio is constructed perfectly to provide stable positive returns rather than track indices with a view to outperform them.
This is backed up by the weekly indicator report, based on both psychological and technical market conditions and factors, which allows VPK to keep on top of its tactical asset allocation and adjust it swiftly and appropriately when it needs to.