BVV, the pension provider for the German financial sector with €34bn in assets under management, has further strengthened its interest-bearing portfolio, investing last year around €2.5bn in bonds with a high investment grade rating and longer maturities with returns of around 3.8%, the scheme said in its 2023 financial statement.

New investments in directly-held bonds amounted to approximately €1.5bn, the fund said, adding that re-allocations to bonds remain on its agenda this year to secure  a predictable income for a longer period.

BVV allocates approximately 50% of total assets to bonds, 7.2% to equities, and 40% in alternatives, which include equity and debt investments in real estate, infrastructure and private equity, according to the statement.

While its allocation to illiquid investments remained unchanged in 2023, the fund’s exposure to equities was cut from 9.5% in 2022.

“Investments in private markets are a cornerstone of our strategic asset allocation,” chief investment officer Frank Egermann told IPE.

The extremely long duration of the fund’s liabilities leads BVV to capture the illiquidity and complexity premiums associated with these asset classes, he added commenting on the 2023 financial statement.

The pension scheme looks ahead expecting a higher long-term risk-adjusted return with private market allocations, compared with public markets, with positive diversification effects due to different factors and processes affecting valuations, Egermann added.

Last year, market headwinds hit the value of individual investments of BVV’s illiquid asset classes. Re-allocations recently to build a more broadly diversified portfolio towards illiquid asset classes did not, on balance, make a positive contribution to the overall performance of the fund, the report stated.

Private equity investments returned -3.1%, while private credit allocations 5.3%, it added.

The scheme waives internal estimates on return and risk of individual asset classes, relying instead only on external experts – for example, investment banks or research providers – to draft scenarios.

“These are the basis of portfolio optimisation in an asset/liability context, and therefore have a significant influence on asset allocation, taking legal, accounting and operational conditions into account,” Egermann said.

BVV plans to cut its exposure to private assets in the future as fixed income promises returns. Yields on bond investments are now sufficient to fulfil long-term promises, it said.

The latest digital edition of IPE’s magazine is now available