Rather than looking at financial markets and making prognoses about their likely returns in 1999, we would like to take this opportunity to address briefly three issues that we be-lieve will plague discussions about pension fund investments in the years to come.

p Is the incipient equity exposure of Euroland pension funds the right choice for the coming years?

p Is active management of financial assets the right way to go? Are indexed approaches making any reasonable progress? Should they?

p How much foreign exposure is right for a pension fund? What exactly is foreign exposure?

On the equity exposure it seems to us that pioneers will still be rewarded. Most investment professionals caution against the risk of entering too late an overcrowded market which is already expensive by historical valuation standards. Our answer would be that the risk is greater of being crowd-ed out of fixed income assets, more than attracted to equities, as debt now provides insufficient returns to meet plan targets. Euroland is underexposed to financial assets relative to GDP and especially underexposed to equities. So equities are still the long-term asset to consider, and they will surely fluctuate. A lot.

Most investment banks and asset managers would have you believe that they can provide added value to in-vestment management. Strict performance standards and a harsher look at actual active returns would probably show what most managers suspect: Consistently adding value through active management is physically possible but as frequent as three consecutive eagles in a golf tournament.

For our part we increasingly sympathise with indexed approaches, but are learning also that some so-called indexed or enhanced indexed styles cost just as much as cheap active mandates. As Euroland funds move into equities, they are likely to discover how crucial total expense ratios and risk adjusted returns are for long term performance.

Finally, Euroland has been a patchwork of countries rather than an integrated economic, let alone financial, area. As the euro sets in, domestic and euro should become synonymous and managers will no longer face the constraints and enjoy the easy scapegoat of complaining about the maze of regulations that now cripple European pension fund performance. The crucial question will thus become very rapidly not how much euro to hold, but what the alternative currencies are.

The quest for diversification is likely to become harder, as more far away places and more acute risk profiles will have to be explored to find it. But then, whoever said this is an easy job?

Santiago Fernandez is chief executive of Fonditel in Madrid

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