Austria’s pensions and asset management industry remains relatively undeveloped but changes are afoot that will change the landscape for good. As more companies are coaxed by the government and more appreciate the predicament of their employees, so the number of multi-employer funds and corporate schemes increases. Billions of euros stored in company book reserves for lump sum payments are soon to be liberated and released into the country’s pension funds. Small wonder that foreign investment managers are looking at the hitherto small Austrian market as a rich seam of future business.
Proposed changes to the Abvertingung (severance payments) are proving a mouth-watering prospect for asset managers and Austria’s pension funds. After serving three years with a company, employees are entitled to a lump sum if they are fired. Austria’s coalition government is trying to agree how these severance payments can be taken off the book reserves and invested. At the heart of the matter is whether these funds should end up- pension funds (smart money backs this) or in insurance companies.
“Taking block payments off the book reserve is the best way forward for Austria at the moment and it would be a pity not to take the opportunity,” says Johannes Ziegelbecker at the multi-employer pension fund OEPAG. Employer contributions are undecided at present but are likely to end up somewhere between 1.5-2.5%. Also as issue is the time at which employers should begin making contributions. Fritz Janda, managing director of the Association of Austrian Pensionskassen, says the government should have these problems sorted by the end of the year and that legislation should be in place by the second half of 2002.
Janda estimates that if all goes to plan then in 10 years annual payments by companies will be as high as Ats30bn (E2.2bn). In addition he suggests the number of multi-employer funds will rise in order to accommodate the new money. “If this whole legislation goes ahead, it will be a very exciting development for the market,” he says.
Putting a precise figure on the amount on book reserves is tricky but Ervin Senfter at the consultants Constantia says it may be as high as E45bn. Many state-owned companies have hefty book reserves so those multi-employer pension funds with many state-owned companies as clients- APK springs to mind- are the most likely to benefit.
Had the government stuck to its initial programme, legislation would already be in place. It has been delayed though, not least because the two coalition members are at loggerheads over the time from which employers should begin contributing. One party argues employers should begin once a worker has been with them a year while the other side argues that, for the sake of workers on short contracts, contributions should start immediately a new member of staff joins. The issue should be resolved some time next year.
Austria retains numerous investment restrictions but these, to much approval, are being relaxed. Thomas Biedermann, member of the board at Victoria Volksbanken, says that for companies with a more Anglo-Saxon approach the restrictions are a hindrance and the 50% limit on equities is excluding them from some highly attractive investments. Hewlett Packard and Compaq, both with American parent companies, are clients of Victoria Volksbanken and both near their equity limits.
The EU has said that the Anglo-American approach is the correct one but Janda says any changes to investment restrictions are unlikely before the EU directive is finalised. With the markets in their present state, few Austrian funds are desperate to fill their equity allocations.
Sensing potential growth in the market, many of what Biederman calls the Anglo-US houses are investing and marketing themselves quite heavily in Austria. JP Morgan Fleming, Fidelity, Invesco, Merrill Lynch and Gartmore are groups often named as having a high profile and many of these groups have opened representative offices in Vienna that house a handful of salesman. Konrad Kontriner, CIO at Innovest, says that for the bigger mandates managers fly in from London or Frankfurt and although this has proved successful for the retail sector, it has proved less so for institutional business.
At the fund level APK, the E1.5bn multi-employer fund, has changed its asset allocation and cut its equity investments to less than 30%. At the turn of the year, equity investment stood at 27% down from a peak of 40% last year. According to the head of asset management Gunther Schiendl, in the fourth quarter last year they grew sceptical about prospects in Japan and slashed exposure to Japanese equities from 15% of the overall total to 7.5%. The fund felt the market bottomed out in June and it is gradually filling out its exposure to equities. Nevertheless, all new cash flows are being invested in fixed income and this year the trend has continued.
During 2001 APK began building up its East European fixed income holdings- Czech Republic, Poland, Hungary, Slovakia and Slovenia- to around 5% of the total assets. Some of these investments have yielded up to 17%, one of the few classes to deliver double digit returns. During the first half of the year, APK also swapped a E50m blue chip US mandate from active to passive. Vanguard replaced Mercury Merrill Lynch, poor performance being the catalyst.
APK has in addition widened its horizons in terms of the fixed income it invests in. At the latest count it held 25% in corporate bonds (at least A grade, some BBB), 25% in agency bonds and 50% in government bonds. Schiendl says this has been a strategic decision- corporate bonds are now more attractive and issuance by the government has shrunk. APK has shunned high yield and will continue to do so unless the economic outlook changes substantially.
Austrian funds remain lukewarm on alternatives but, as of September, they are entitled to invest up to 5% in hedge funds. Previously Austrian institutions were only able to invest in bonds linked to the performance of hedge fund of funds. APK says it has considered investing in hedge funds and private equity but it remains wary. “We feel it might not be wise of us to invest at the height of a wave and we shall wait until next year to see if the promises are kept,” says Schiendl. As with most funds in Europe, bar all but the largest, most take an interest but are, in practice, exercising a policy of wait and see.
One issue refusing to disappear is that of links between pension funds and political parties. “Multinationals do not like these kind of political ties,” says Biedermann at Victoria Volksbanken. If any generalisation can be made then it is that OEPAG is typically labelled as conservative, Vereinigte socialist.
One pension fund manager is quite bitter about the extent to which political allegiance still determines companies’ choice of fund- many are seen to go to those deemed to represent “their party.” ORF, the Austrian Radio and TV company recently launched a tender to join a fund. But, says the manager, “in reality everyone knew that before the tender was even evaluated, it was going to go to Vereinigte and OEPAG. It’s an unhealthy state of affairs and it doesn’t really look like it’s going to change.”
OEPAG’s Ziegelbecker says there is a small element of party allegiance but that it is overstated. “Success depends on how good you are and how good you are at demonstrating the quality of your management,” he says. Of OEPAG’s E1.5bn, Ats3bn (E0.2bn) belongs to shareholders or their associates, the rest is third party money.
In addition, there are the ties between the pension funds and the fund managers of their shareholders. So old and ingrained are many of the relationships between funds and managers, outsiders face difficulties breaking into the market. Nowhere is this better demonstrated than at Innovest, a manager that can hardly be described as an outsider. Previously Siemens’ in-house asset manager, it was launched as a separate, albeit wholly owned, manager for Siemens’ pension fund and subsidiaries. One of the reasons to establish it as an independent manager was to try and win third party assets, a process that Kontriner admits has been a little slower than expected. Late last month it secured a E47n mandate from an Austrian corporate fund.
Of the E2.1bn under management, 85% belongs to Siemens in some form or another and although Innovest manages money for Winthertur and APK among others, Kontriner admits that the going has been tough. “It’s very hard to get market share here but we are not going to go for market share at any price. Close connections between investors and banks make it very hard to get into the market,” he says. The 15% belonging to independent groups is a little below expectations but Kontriner says this is partly explained by caution on behalf of institutional investors- although the retail business continued to grow last year, the institutional market is down by more than 6%.
Innovest’s approach is worth scrutiny. The group lacks in-house management, instead acting as a manager of managers. Siemens’ pension plan holds around 58% in bonds and 42% in equities and at present, up to 5% is held in convertibles. “If markets are very volatile, we use convertibles so that we have exposure to equities but they offer a bit of downside protection,” says Kontriner
Innovest recently suggested the Siemens fund invest up to 10% of the assets in corporate bonds. European treasuries offer between 5% and 5.5% and with target returns of between 6.5% and 7.5%, it’s clear that treasuries are unable to produce this. With equities so out of favour, corporate bonds are proving a popular alternative.
OEPAG, Austria’s third largest pension funds, has reduced its exposure to foreign bonds in order to cut risk. OEPAG employs Austrian managers for the fixed income with the exception of Invesco who runs the high yield. On the equity side, the fund employs some of those foreign managers marketing themselves in Austria. More specifically, State Street and Capital Group and JP Morgan Fleming for emerging markets.
At BVP, 3% of its portfolio is in emerging bonds and corporates although it has yet to go as far as high yield fixed income. As with most of the large funds, Austrian bonds tend to be looked after by local managers. On the equity side though and BVP employs amongst others Putnam, Capital International and Anglo Irish. Following an asset liability study, managing director Ferdinand Kernbauer says the fund is considering setting up a new small and medium cap global equities mandate although at a minimum of E40m, it would require pooling from a number of the VRGs.
Perhaps the largest overhaul has been at Vereinigte where they completely restructured equity mandates. When Wolfgang Pinner joined as CIO at the beginning of the year, he found the performance of the funds’ equity managers lacking. A review with the German consultants FERI led the fund to break its equity investment 20:40:40 into quant-based enhanced indexing, a bottom-up, style approach and a traditional fundamental approach. Of the six managers - Deka, Brandes, W P Stewart, Wellington, Putnam and Capital Invest/Erste-Sparinvest, all bar Capital/Erste are new.
Overall the fund decided to underweight European equities relative to other global regions. “We’ve been hearing for over four years how good European stocks were going to be but it just hasn’t happened,” says Pinner. Vereinigte is convinced that US stocks are likely to produce better returns than European stocks and according to Pinner the average Austrian fund still maintains modest holdings in Euro and Austrian stocks. On the fixed income side, the structure remains much the same although the fund appointed Volksbanken KAG in May and Select Invest, a new asset manager in Austria, in June.
All the indicators of future asset management business appear promising. In the past year many companies have joined multi-employer funds and the number of employees covered is up 8.5% this year to 307,000. Janda says that next year there will be one new single pension fund and one multi-employer fund. In addition, Wuestenrot PK, the insurance company pensionskasse launched last year, is converting from a single to a multi employer pension fund. Consultants Constantia is launching a new sub fund (or VRG) for a big local telecoms company. The BVP is opening two more VRGs next month and although Kernbauer opted not to disclose the client’s names, said that the target return for the new funds will be 6.5% per annum, one point lower than the BVP’s 11 other VRGs.
One of the most awaited decisions is that of the Ats4bn Verbund pensionskasse which is looking to merge with one of the multi-employer funds. At present there is no suggestion as to which pension fund Verbund will join although Pinner is convinced almost every Austrian fund will have pitched for the business.
Austria’s business news has recently covered stories highlighting the plight of many pension funds and whether they will be able, given the state of the markets, to achieve their planned returns. For the older funds with reserves, this isn’t a problem while the younger ones with perhaps a more aggressive approach might find themselves squeezed a little. As with funds and asset managers across Europe, Austrian’s are all feeling the pinch a little: “The whole industry is under pressure to provoke good performance figures,” says Pinner.