Phoenix from the ashes
Antoni Canals tells Nina Röhrbein about his views on diversification at Pensions Caixa 30, one of Spain’s most diversified occupational pension funds
Amid queues of unemployed workers outside job centres, properties lying empty and the Spanish economy still in tatters, one of the country’s pension funds – Pensions Caixa 30 – is emerging as one of the largest and most diversified DC schemes in Europe.
All of its members are employees of the savings bank La Caixa. Due to Spain’s turbulent economy, the bank has merged with eight other banks since 2010, meaning that the number of its employees has increased by more than 35%. The largest merger – with Banca Cívica – took place in 2012, adding 8,000 new members to the pension scheme.
But all the employees from the acquired banks have been integrated into the scheme with the same conditions.
While Pensions Caixa 30 officially aims for the best risk-adjusted returns, the unofficial objective it has set itself is to beat the salary increases of its workers in the long term. As part of their career path, La Caixa increases the salaries of the employees it promotes above the inflation rate.
“In order to maintain retirement coverage in relation to the employee’s salary, we need to beat historic inflation by four to six points, which is a difficult goal to achieve,” says Antoni Canals, chairman of the board of trustees at Pensions Caixa 30.
The fund has yet to achieve that self-imposed goal, which Canals attributes to the crisis year of 2008. “Without that year it would have been a more feasible objective given proper asset allocation, market behaviour and risk control,” he says.
VidaCaixa is responsible for the tactical asset allocation and portfolio construction of Pensions Caixa 30, based on decisions taken by the investment committee.
At present, Pensions Caixa 30 has an asset allocation of 45% to bonds, 35% to equities, 15% to alternatives and 5% to cash. The cash element is driven mainly by the guarantees needed for its de-risking or hedging strategy.
Each of the three main asset groups is diversified across markets and sub-asset classes.
However, the pension fund’s beginnings were much more humble. It started out with an allocation of 75% bonds and 25% equities in spring 2001. This strategy was heavily revised in 2006 after markets began to recover from the dotcom crisis; by the start of the Iraq war in spring 2003 the equity exposure was as low as 14%.
The current asset allocation strategy began in 2007. While it has steadily evolved since, the main structure has remained the same.
“Over the years, we have shortened the duration of sovereign bonds due to low interest rates and the volatility risk that the required mark-to-market valuation brings with it,” says Canals. “Lately, we have shortened the [duration of the] portfolio itself, which has resulted in a sovereign debt allocation of only 14% of the total portfolio, compared with more than double that before.”
The pension fund’s sovereign debt is mainly Spanish. The fund decided to concentrate on domestic government debt in late 2011 when its risk premium approached 7%. “We understood that the state would pay back any debt in the end,” says Canals. “As the Spanish risk premium has somewhat normalised, we are now diversifying our sovereign portfolio again with AA- or AAA-rated bonds, such as Dutch and German ones. We are probably the biggest corporate pension fund in Spain that is the least exposed to Spanish government debt.”
In addition to the 14% invested in sovereign debt, the fixed income portfolio comprises 17% corporate debt, 7% emerging market debt and 7% high-yield bonds. Sovereign and corporate debt was previously held only in euros, but it now also contains some US Treasuries and UK Gilts.
Emerging market debt is currently dollar-denominated, but following advice from Mercer last year that emerging market currencies are set to outperform the US dollar in the long run, the pension fund is also eager to diversify into local currencies in future.
Equity diversification has been reflected in the changes to sub-portfolio names.
The 10% US equity portfolio now includes equities in Canada, Mexico, as well as the US, and has been renamed ‘North America’. The new Asia-Pacific portfolio was previously Japan-only, and makes up 3% of overall investments. The European portfolio includes Spanish equities and amounts to 10%. Emerging market equities and global thematic markets make up 6% each.
Global thematic markets – which include clean tech, solar, waste management, luxury and high dividend – used to be the fund’s socially responsible investment (SRI) portfolio.
“We have reformulated our previously limited SRI policy to a more comprehensive global policy,” says Canals. “We felt that having 3-5% of our portfolio dedicated to SRI investments was no longer the right way to address this space. In 2010, we asked an external provider to create an environmental, social and governance (ESG) rating of our portfolio, and we are now approaching the end of the three-year assessment period of the project to see how the evolution of the SRI portfolio has affected returns and other things.
Following this exercise, we will start looking for providers that have the scope to engage with the managers of our funds. We aim to become active indirect shareholders, thereby fulfilling the second principle of the UN-backed Principles for Responsible Investment (PRI),” he adds.
The pension fund became a signatory to the PRI in late 2007. From 2013, the pension fund’s ESG analysis will for the first time also include bonds.
The pension fund can invest between 5% and 20% of its overall portfolio in alternatives, depending on what opportunities its asset management company, VidaCaixa sees. Its current 15% exposure includes, 3% commodities, 5% private equity, 3% real estate and 4% hedge funds.
“To date, we have always been underweight alternatives because Spanish law is quite restrictive, particularly concerning private equity,” says Canals. “We are in the process of redesigning the alternatives programme with help from our advisers at Mercer, which will eventually lead to an external mandate.
“We feel comfortable with our current commodity and real estate exposure, but less so with hedge funds based on their performance in recent years. We want to increase our private equity allocation to a significantly higher level in the next three to four years compared with what we have in place now because, with an average member age of below 40 years, this is a very young fund. This is why we can establish a long-term policy for investments in the real economy, which is what private equity is for us.”
The pension fund also wants to exploit the asset class in all its components in the future, including infrastructure, timber and farmland. The real estate portfolio is currently invested in real estate investment trusts in Europe, the US and Australia. Commodities include indexed funds, exchange-traded funds, as well as directly managed or mutual funds that invest in commodities. All food commodities are excluded.
In fact, with the exception of the sovereign and corporate debt portfolios, all investments are undertaken via funds. “For this reason, we consider ourselves a fund of funds,” says Canals. “To manage a globally diversified portfolio from Barcelona with a single investment management company would have been beyond the skills of any asset manager. We have even started to move into mutual funds on the government and corporate debt side.”
Decisions on which fund and manager to pick are based on solvency criteria, medium-term returns, team stability, risk control, operational assurance, volatility, fees and ESG factors.
The pension fund’s control commission is responsible for establishing the strategic asset allocation and the bandwidths of individual asset classes with the help from the investment adviser and the investment management company.
The decision on any selling or buying and the timing of the operation is the responsibility of VidaCaixa.
The control commission also designs a tail-risk hedging policy that is implemented by VidaCaixa. The impact of that policy, its daily value and revision, is managed by the commission.
The investment committee, meanwhile, meets monthly to control performance, analyse future developments and ensure the investment strategy is aligned with the investment objectives and market conditions.
Pensions Caixa 30’s investment strategy makes the scheme an outlier in the Spanish market, where the norm is to invest 60-80% in Spanish and other euro-zone bonds and 20-40% in mainly Ibex or Euro Stoxx equities, with only minor allocations made to hedge funds or real estate.
“We invest, for example, less than 2% of our equity portfolio in Spanish equities and even that is mainly because some of our European managers have Spanish equities in their portfolio,” says Canals. He attributes the asset allocation of the majority of Spanish pension funds to a number of issues.
“Spain’s largest companies have pension funds,” he says. “Those used to be DB plans which were transformed into DC schemes in the late 1990s and early 2000s. That switch was accompanied by a law that assigned the majority of the control committee to member representatives, in other words the unions. But union members often do not have enough financial knowledge, therefore it is difficult for some pension funds to deviate from what has been suggested by the sponsor or management company. We have been lucky in that the majority of people in our investment committee are financial experts in many areas, which is why we can operate like other global funds. We believe in a model that is completely diversified and able to deliver the returns we need. And we tell our participants that we are able to support one year of negative returns every six or seven years.”
Canals is worried, however, about Spain’s political backdrop. “In the absence of economic growth but rising unemployment, longevity and a growing state deficit, countries such as Hungary, Argentina and Portugal have nationalised second-pillar pension funds in order to help cover their budget deficits,” he says.
“This means we can never be sure about the intentions of the government in a serious crisis although the majority of our investments are in foreign instruments. We would be less worried if there was fiscal and legal harmonisation in Europe with regard to pension funds.”