Two special characteristics led to Germany’s Nordrheinische Aertzeversorgung (NAEV), the North Rhine Doctors’ Pension Scheme, entering and winning IPE’s coveted themed award for property investments: the restructuring of its real estate portfolio and its risk-adjusted asset allocation strategy.
Founded in 1959 in the densely populated and highly industrialised state of North Rhine Westphalia, the fund has 50,000 members, of which 38,000 are active and 12,000 actual pensioners. It is a defined benefit structure that now acts as an alternative to the traditional mandatory German retirement provision that is based on insurance.
NAEV sources its capital in two ways: through straight-forward ‘capital cover’ insurance contracts and flexible direct contributions. This gives it a 45% cover ratio, equivalent to €7.5bn at September 2005, which is invested based on the results of its asset-liability studies.
NAEV says all the fund’s corporate divisions are linked by common software, which it claims not only facilitates communication, both internally and externally, but allows a very high degree of transparency in planning, implementing and controlling its investments.
The first area NAEV wanted the judges to consider is detail is the real estate portfolio. Accounting for anything between 12 and 15% of the fund’s overall assets, NAEV has revamped its property assets to form a pyramid structure, with three tiers for direct, indirect and indirect investments through real estate investment trusts (REITs).

Making up the pyramid’s base are direct investments, which are made in five German regions: Berlin, Duesseldorf/Cologne, Frankfurt, Hamburg and Munich. The indirect investments form the middle and are in properties outside Germany that the fund makes in conjunction with Spezialfonds and through its shareholdings. The upper tier also contains indirect investments but these are made exclusively through fund companies and REITS – dedicated property investment firms.
NAEV says the advantage of the pyramid is that it can gradually increase the level of diversification both geographically and across the trusts it invests in. This way, NAEV has built a solid foundation to be able to manage its real estate portfolio efficiently and ensure transparency in its international holdings.
Next, NAEV put forward the fund’s risk-adjusted asset allocation strategy for consideration. This seeks to ensure it meets its obligations by combining the traditionally conservative investment policies of the German pension system with the risk-averse philosophy of its supervisory authorities. NAEV believes it has found the best solution in a customised quantitative model that maximises long-term returns, while respecting investment restrictions imposed by its risk controls.
NAEV set up a dedicated task-force to develop, monitor, review and improve the model.
Chaired by the fund’s general manager, Dirk Lepelmeier, the task-force meets regularly and includes NAEV’s asset allocation team and members of Osnabrueck University’s Institute for Financial Economics.
Thus far, NAEV says the strategy has produced clear results. In short, it has enabled the fund to calculate its risk budget continuously and efficiently, taking full account of how much it needs to provide as pensions payments. This means once NAEV has estimated the minimum asset yield it needs to generate, it can determine how much it can use to invest in the markets.
This leaves NAEV free to distribute the risk capital among the various asset classes it chooses. Its allocation policy is determined by periodic asset-liability studies, in which volatility and correlation are major determinant factors.

NAEV ensures its investments are solid and efficient by estimating the worst possible losses it faces for each of its individual mandates. It determines these using continuous portfolio protection insurance (CPPI) hedging strategies – asymmetrical, non-benchmarked hypothetical investments that take into account the worst possible drops in prices.
Once it has determined maximum losses its assets could suffer, it sets probability limits based on confidence indicators.
NAEV believes this leaves the fund with a strategy that not only fully exploits, while never exceeding the capital at its disposal, but also maximises its long-term profitability by stretching the risks to the limit.
NAEV believes the results thus far of its risk-adjusted strategy are very encouraging. It has ensured the fund can perform at its highest possible level while strictly adhering to the loss parameters it sets itself. So encouraging in fact, that NAEV says the state supervisory authorities in North Rhine Westphalia wasted no time in awarding it an operating licence following successful testing and NAEV is now offering its services and risk-adjusted strategy to other German funds. To date, the fund has won two risk management contracts worth €2.6bn.

Highlights and achievements
The administration and careful planning that obviously go into this fund set it apart from its peers. Its strict risk management ensures its asset-liability studies recommend the best possible asset allocation policy without jeopardising its ability to meet its obligations.
Adopting a pyramid approach to its real estate portfolio means it can easily monitor and adjust its investments in the asset class within each tier’s strategic limits.
Finally, recognising the importance of communication by ensuring all its corporate departments remain in constant touch with each other is the best possible way the fund can maintain transparency across the board.