Average gains of 1.4% in the first quarter of 2021 took Portuguese pension funds to an average 13.1% return for the 12 months to 31 March 2021. 

Most of that gain of course came from the recovery after the market plunges in March 2020, following the first COVID-19-linked lockdowns.

In contrast, the 12 months to 31 December 2020 had produced an average 2.3% return.

The Q1 2021 returns bring annualised three-year returns to 2.8% as at end-March 2021, with five-year returns of 2.6% to the same date, according to Willis Towers Watson (WTW). These compare with 2.1% and 2.2% for the annualised three- and five-year returns, respectively, to end-December 2020.

Performance figures were submitted to WTW by around 75% of the pension funds in Portugal, the overwhelming majority of them occupational funds.

“The returns of most equity markets were very strong in Q1, especially when measured in euros, with most markets returning close to double digits,” said José Marques, director, retirement, WTW.

“This was only partly offset by negative returns on fixed income, which resulted from a general rise in bond yields as inflation started to be a concern this year.”

He said most pension fund managers in Portugal hold durations slightly below benchmarks, which helped mitigate part of the rise in bond yields that occurred in the first quarter. 

At the end of March 2021, equities made up 20% and real estate 11% of Portuguese pension fund portfolios, according to data from regulator ASF and from the Association of Investment Funds, Pension Funds and Asset Management.

However, the lion’s share of assets – 61% – was in debt, compared with 64% at end-March 2020. Half this allocation was direct holdings in government debt.

Marques said there is at present a noticeable reduction in fund managers’ bias towards Europe. 

He said: “Traditionally, fund managers in Portugal tended to favour European equity compared with other geographies. There is currently a strong trend to opt for global equity benchmarks, which we believe makes sense in order to improve geographical diversification.”

There is also a material increase in allocation to index funds with an ESG bias, Marques said.

He observed: “Current legislation requires pension funds to consider ESG factors in their investment policies, and using index funds with an ESG bias has been one of the preferred routes. We believe there is still a long way to go to ensure pension funds are indeed capturing the ESG factors that they want to capture, but a lot of progress has been made over the past year.”

Turning to the prospects for global stock markets over the next few months, Marques said: “We believe there is still significant uncertainty in the future trajectory ofinflation, yields and equity markets, and the best way to address that uncertainty is to build diverse portfolios in terms of asset classes, geography and industry, on a strong ESG framework and hedged against changes in interest rates and inflation.”

And he pointed out that as a result of the recent rise in yields, pension fund liabilities have reduced significantly in value.

“Some pension funds are therefore looking to crystallisesome of those funding gains by increasing the duration of their assets to better match their liabilities,” he observed.

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