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Pensions Caixa 30 to move from Spanish bonds to illiquid assets

• Pensions Caixa 30
• Location: Barcelona
• Assets: €4bn (plus a further €1.59bn in insurance policies)
• 44,000 members

Evolution not revolution is the name of the game for Pensions Caixa 30, Spain’s largest pension fund with €4bn assets under management, a further €1.59bn in insurance policies and almost 44,000 members at present.

The portfolio is almost entirely invested through mutual funds. 

The fund, a signatory of the UN Principles for Responsible Investment, will soon be embarking on a programme of holistic socially responsible investing throughout its entire portfolio. The motive is not entirely altruistic: the fund believes that it will produce good long-term returns and less volatility.

However, at asset allocation level, the approach is to tweak rather than alter radically.

For instance, this year the only change has been moving 1% of the cash allocation into alternatives, which now make up 16% of the portfolio.

Nevertheless, one crucial decision three years ago was to increase the fund’s Spanish bond holdings before the general election in 2011, a move that Antoni Canals, chairman of the pension fund’s board of trustees, says made it a lot of money, because of the dramatic reduction in the risk premium of the Spanish bonds since then, to the extent that it seems to be experiencing a price bubble.

Canals says: “It is dangerous in the long term to fill your portfolio with paper from the most indebted countries in the world. The returns on Spanish 10-year bonds are now lower than for 10-year Treasury bonds, which is hard to believe, especially if you remember that less than two years ago we had almost a 6% risk premium in US and German 10-year bonds.”

As it is, the pension fund has returned 11.95% over the 12 months to end-August 2014, and an average of 7.61% per year for the five years to that date.

The portfolio is currently invested 44% in fixed-income, with 35% in equities, 16% in alternatives and 5% in cash.

The strategy is to reduce bonds further, substituting them by more illiquid assets. The fund therefore plans to start investing in infrastructure and timber, alongside the other alternative asset classes in its portfolio – commodities, hedge funds, private equity and real estate.

The fund has a growing number of active members, partly as a result of the mergers between its sponsor, Caixa Bank, and nine other banks in recent years. Sponsors’ contributions still outweigh the pensions paid to retired members, so the fund can afford to seek a liquidity risk premium.

Meanwhile, it is bearish on Europe, holding more than  45% of its portfolio in non-euro currencies. 

Canals says: “There is anger and populism on the continent, as well as lack of harmonisation and political leadership and there could possibly be a war in eastern Europe. We believe the euro has been overvalued in the last two or three years. Nevertheless, our policy is to hedge half of our assets in foreign currencies (we see them as an ‘accident’ rather than an asset class) but our managers have complete freedom to hedge currencies in view of the market trends.”

However, the pension fund sees the US as a more dynamic economy – for instance, US and EU equities each make up nearly 30% of the equity portfolio, which implies underweighting the US market. 

In particular, the fund plans to investigate private equity opportunities in the US and other non-domestic markets.

Canals says: “Our private equity is too focused on Spain and Europe generally, and we want also to rebalance that.”

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