Launched in 1993, Portugal's small €94m BPI Valorização is unlike many of the other schemes represented at this year's IPE Awards. It does not represent a single company or group or a particular industry. It is an open pension fund that any company from any industry can join to build up and provide retirement income and benefits for its employees. Contributions are pooled and invested together to form an aggregate asset base.

"There are no legal constraints governing membership of BPI Valorização and we do not restrict membership ourselves," the fund says. "However, in general, we are aimed at investors with a moderate risk tolerance as our equity investments total just 25% of our total asset allocation."


BPI Valorização says that initially the investment process it favoured was based on a traditional management model with investment decisions being taken by committees. But a fresh attitude to research showed a more flexible approach could be more beneficial.

"It was about four years ago that we begun to develop and implement quantitative models," BPI Valorização explains. "It has been long proven that these models are flexible, systematic and disciplined, minimising the need for human intervention and improving risk controls, to mention but a few of the more important advantages."
BPI Valorização confirms that all the models it uses in the scheme's asset management are developed entirely in-house by a separate operating entity called BPI Asset Management. "First and foremost, BPI Asset Management is responsible for researching and analysing the financial markets with the aim of identifying patterns in their evolution," the scheme says. "Next, it will take different variables and scenarios to draft hypotheses to test the behaviour of the markets and their effect on the scheme. Next, it will evaluate the results in line with our risk/return objectives and ascertain whether their findings are consistent with the schemes objectives and can therefore be adopted or rejected."

But that's a simplistic and somewhat rigid way of testing the market. BPI Valorização says this central process is supplemented by interim and periodic reviews which will help determine areas where it can improve its risk/return profile or times when it needs to be vigilant and watch its development closely. "There are times when models are abandoned as they no longer respond adequately to potential structural changes to the markets," the fund points out.

BPI Valorização says that the quantitative modelling was initially applied in tactical asset allocation decisions regarding the scheme's portfolio's main asset classes - essentially equity and fixed income. But this has changed and the models are now also regularly applied to other asset classes BPI Valorização invests in, such as the credit markets and commodities.

But with just 25% of its assets in equities, BPI Valorização has recently launched a specialist research tool to assist in the evaluation of mutual funds to ensure it invests in the best. "At the start of 2006, we began developing a tool that seeks to highlight the best equity investment funds. This tool can be applied to any geographical area, and we use it to select both European and US equity mutual funds we want to invest in," BPI Valorização says.

"At first, we considered using one of the various existing tools that can be bought in the market. But after taking a detailed look, we concluded though that these were not flexible enough to respond to BPI Asset Management's needs, so we developed our own evaluation model in-house. This not only gives us the advantage of building up extensive knowledge of the mutual fund market and the investment process governing it but also full control of the resulting selection methodology," it adds.

BPI Valorização begins its research by considering a huge universe of funds representing the aggregate of various investment fund databases. "Out of this initial pool, we exclude those funds that do not have sufficient history or adequate size for our purposes," the scheme says.

Once the reduced pool has been selected, BPI Valorização begins to analyse each one more closely using Nobel Prize-winning professor of finance, William F Sharpe's renowned Return Based Style Analysis (RBSA) approach, which assumes an investment fund's returns reflect its manager's style. "Applying this methodology allows us to determine the best benchmark for each fund. This helps best explain the returns obtained by the manager, allowing a more accurate evaluation of their capacity to generate long-term alpha," says BPI Valorização.

With the benchmarks determined, the scheme next splits the funds it has selected into quartiles based on their excess returns and their information ratio. "Only the funds from the first quartile of each criterion are selected for further analysis," it says.
But the funds in the remaining quartiles need not feel left out. There is still a place for them in BPI Valorização's analysis, as they are used in any follow-up tests to the RBSA to ensure they remain a valid choice in the selected universe. "So far, we have obtained the results we were expecting, with decreasing average returns from the first to the fourth quartiles, in both the European and US equity markets," BPI Valorização points out.

BPI Valorização says this project was launched with the objective of improving its overall returns by including a better set of mutual funds. "So far it has fulfilled its promise, since the funds selected have outperformed their benchmarks by an average of around 1% per year."


Equities continue to form the backbone of pensions schemes' investments. BPI Valorização's equity holdings account for just a quarter of its asset allocaton. Diversification across the equity markets is possible but ensuring it gets the best possible funds in line with its scheme's investment objectives is paramount and requires a carefully planned selection process,

This is just what BPI Valorização has achieved. It has developed its own analysis model that systematically and efficiently removes those funds that do not quite make the mark by a continual process of evaluation and analysis to leave it with a equity fund selection that consistently outperforms its benchmark.