Managing the investment portfolio

Senior managers at some of Europe’s top pension funds agree on one thing: that they are investing for the long term, though they differ on how to achieve their aims in terms of how they manage their funds, allocate assets and monitor their absolute returns. The executives were speaking at the first of two seminars at the annual IPE Awards in Amsterdam.
The seminar probed the executives’ approach to investing – and all echoed ABP chief investment officer Jean Frijns’ assertion in his keynote speech earlier in the session that “the long term is getting longer”. But they differed in their own strategies to invest over the long term.
One area where the managers differed was whether they have a strategy to monitor the absolute returns of their funds. William MacDougall, chief investment officer of TRW Investment in the UK, told delegates that he does not have an absolute return strategy, preferring to set a long-term benchmark for the performance of his funds.
But Roderick Munsters, chief investment officer at Dutch fund PGGM, stated that he has two approaches – one which is judged against Libor (the London interbank offered rate) and the other that he operates in the room left to him by regulators and trustees. Munsters says he can generate values in real estate assets by investing at net asset value, regardless of share price strategy – which he says has given a return of 7–12% in recent years.
Santiago Fernández, chairman of Spain’s Fonditel, stated that his fund has a clear strategy so that his fund knows that assets are “where they should be”. He monitors the fund’s assets on a daily basis. Paolo Tosi, finance director at Inarcassa, said that the fund has total control over asset allocation internally.
The speakers differed in their asset allocations. Fernández’s e3.6bn fund has 35% in equities and 65% in bonds. MacDougall’s e4.7bn fund has 70% in stocks, down from 85% three years ago. He said it is easy to overstate the case against equities. He likes stocks because strategically they are a real asset. PGGM’s Munsters says his fund has 43% invested in stocks. He added that 25% is in alternatives such as real estate and commodities.
Inarcassa’s Paolo Tosi said his fund is 41% invested in bonds and 18% in stocks. He saw signs of a recovery in stock market sentiment driven by improving economic data and corporate news.
Alternative assets – such as commodities and real estate – were discussed. Fonditel’s Fernández noted that alternative investments were not the “salvation army” coming to the rescue of pension funds. They were just another asset class to be treated in the same way as any other, he suggested.
Hedge funds were not highly regarded by the delegates. Fernández said it was difficult to sift the wheat from the chaff and that, in any case, his fund used similar techniques to those used by hedge funds. He also questioned their fees, and the murkiness of the numbers. His sentiments were supported by other speakers.
Currency risk is another area where the executives differed. TRW’s MacDougall, who has 20% of his portfolio in foreign stocks, said he does not hedge his foreign exchange risk. He said there is a natural hedge in owning foreign stocks – which also provide good real assets and diversification. He differed from PGGM’s Munsters, who said his fund’s large foreign portfolio is 100% hedged. Fonditel’s Fernández said the question was not whether to hedge but when to hedge.

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