Austrian rules concerning derivatives are impeding severance pay funds seeking to embrace socially responsible investment (SRI) principles, the VBV Vorsorgekasse has warned.
According to Austrian law, severance pay funds, or Vorsorgekassen, can only hold up to 5% of their portfolios in derivatives, and for the calculation of this allocation, they must employ a ‘commitment approach’ – similar to other institutional investors – as defined under the ESMA’s Committee of European Securities Regulators (CESR) guidelines.
Risk exposure via derivatives is calculated according to the underlying market value of the hedged asset in comparison to the positions in the portfolio, and this net exposure has to be reported in the derivatives allocation of the fund.
Günther Herndlhofer, head of asset management at VBV, told IPE: “That means, because we are not a benchmark investor, that parts of any derivatives we use count directly towards our derivatives allocation, while with a simple hedging approach we could offset it against investments in our portfolio.”
The €2.1bn fund is one of 10 providers in Austria that are managing money from the mandatory severance pay scheme into which every employer has to pay part of its employees’ salaries.
Almost all of these Vorsorgekassen are committed to a 100% sustainable investment portfolio.
According to Herndlhofer, this creates even more problems when it comes to derivatives.
“As an investor applying sustainability criteria, we are never close to any benchmark, which means we are even more constricted in our hedging opportunities,” he said.
He argued that regulations regarding Vorsorgekassen should be amended to take into account the limited universe under sustainability criteria.
“We do not want to use derivatives for speculation but for hedging,” he said, adding that he could “understand” the FMA’s motive in capping derivative allocations to prevent excessive hedge fund investments.
The asset management head also noted that, for Vorsorgekassen, any breach of regulations did not just result in a reprimand but in penalties, as these vehicles are regulated under the legal framework for banks.
Another issue Herndlhofer would like to see resolved in Austria is that of real estate investments for Vorsorgekassen.
He said it was unclear whether a real estate fund should be counted towards the AIFM allocation in the portfolio or towards the real estate allocation.
“The harmonisation of European regulation was actually very much cut to fit existing Austrian legislation, but it should rather be geared towards investment reality,” Herndlhofer said.
Further, Vorsorgekassen can only invest in real estate funds involved in OECD and EEA countries – and have set this focus down in their prospectus.
“Not many funds explicitly state this regional focus, and no other investors have to demand this limitation,” Herndlhofer pointed out.
He says this represents a “major handicap” when investing in the asset class.