What is your outlook for 2014?
Deputy CEO and CIO
• Invested assets: €32bn
• 900,000 active members from 36,000 companies
• Solvency ratio: 25.8% or 1.9 times the required level of solvency
• Date established: 1961
For the coming year we will continue to treat the market as being slightly risk-on.
Share prices have been rising – in some markets very dramatically – which is why we have to be careful with new investment decisions.
But because interest rates remain low, credit is expensive and credit spreads are already squeezed, we are ready to take on more risk.
The European equity market remains attractive because the economy is coming out of recession. In addition, it has been a tough year for emerging market so the outlook at least for some regions has improved.
In our analysis, we focus on the fundamentals but when we drill into the different industries we undertake stock picking because we are aiming for absolute return in the long term.
Our equity portfolio (including private equity) currently makes up 40%. But as part of our investment roadmap 2020, our overall portfolio is changing. We will, for example, continue to gradually increase our private equity investments. At present, our exposure to private equity stands at 4.5% but we are targeting 5%. We expect the volume of mergers and acquisitions to be higher, which is good news from a private equity investor’s point of view.
We will strengthen our real estate portfolio, especially with regard to foreign investments. At the end of September, our allocation to real estate made up 11.4% but we aim for 15% over the next five years.
The increase in allocation to alternatives and equities comes at the expense of fixed income. Cutting exposure to bonds has been the aim this year and will continue to be so in the future.
The risk is rates going up quickly in a short space of time, which is why we are currently better off running short duration strategies. Opportunities in the space are difficult to find.
Our 2020 roadmap also helps us when it comes to making investments in IT to improve the running of our office because IT is expensive. However, as we manage 80% of our portfolio in-house it is crucial.
At the beginning of 2013 we opened a small office in Shanghai with one senior portfolio manager. Our presence in China is only going to gain in importance as we will be looking to invest more in this market.
• Invested assets of Corem: €6bn
• Members of Corem: 200,000 active members, 100,000 pensioners
• Hybrid of DB and DC
• Date established: as a legal entity in 2002, but inherited an old teachers fund from 1949
We expect a gradual recovery in European economic activity for 2014. We also think inflation and interest rates will remain low.
The worst of the credit crisis is behind us and the economic environment is looking up. Equity markets are set to remain bullish – I expect the CAC 40 Index to reach 4,800.
But of course investors like us will also continue to focus on the actions of the US Fed.
Our investment strategies are to a large extent based on macro-economic factors and our decisions are made based on stochastic models we calculate annually. These models try to find the most efficient strategic long-term asset allocation with the best yield-to-risk ratio.
Our strategic asset allocation consists of 68% fixed income including cash, 15% equities, 9% real estate, 5% hedge funds, 2% private equity and 1% infrastructure.
In the current low interest rate environment, we try to invest in higher yielding assets, which is why we are overweight real estate.
Equities are attractive because of dividend levels, while infrastructure assets are set for good long-term performance.
Half of the equity investments are allocated to non-European equities, with emerging markets making up 12%. However, we have recently decided to reduce our investments in the BRIC countries and replace them with a 5% frontier market exposure.
Frontier markets are cheap and have a positive growth outlook, which is why we expect good performances from, for example, Argentine, Bangladeshi, Kenyan and Iraqi equities.
In the fixed income portfolio, we continue to diversify through external investment specialists into European and US high yield, European and US convertibles, emerging debt other than local currency and private placements.
We have increased the number of private placement since last year in spite of the European private placement market not being as developed as the US one. Last year, we issued a private placement on a French group specialising in long-term care such as nursing homes. This year we have been working with another large French company.
The biggest challenge for UMR Corem remains the introduction of Solvency II’s pillar I regulation, because in France we do not have the same statute as a pension fund. However, we are no longer consider moving the fund abroad.
• Invested assets: €14.5bn
• Participants: 600,000
• Solvency ratio: 112.3%
• Date established: 1964
Corporate balance sheets worldwide are in better shape than consumers or governments. This means that the outlook for asset classes like equities and credit is still relatively bright although equity markets have gone up already over the past couple of months.
Although equities are not cheap, they are still attractive, especially in the US. In Europe, investors need to be more selective which markets to pick.
We are planning to plough further into equities next year at the expense of fixed income. It is all about the beta, especially as the US has become more competitive versus China on the back of the weaker dollar and developments in commodity markets. A lot of manufacturing is returning to the US.
However, I believe that the world is heading for another bubble in US stocks, not necessarily in 2014 but maybe at a later stage because the economic recovery in the US is not shared by Europe and emerging markets yet.
We believe that interest rates will remain at their historical lows because loose monetary policy is set to continue, and inflation is going to remain low. The euro-zone is even flirting with deflation. As we do not expect interest rates to rise, we are keeping our relatively high interest rate hedge in place.
We have a prominent place for the economic outlook in our yearly asset allocation and our macro-economic views are hugely influential but the allocation is based on the solvency position of the fund and on regulatory constraints.
We will be looking at all types of illiquid investments next year – such as real estate, bank loans, direct lending and private equity – but given the nature of those investments we need to prepare well before we allocate. We are planning to form an internal working group in 2014 to study illiquid investments before making up our minds later in the year as to which ones to invest in.
We have had a terrific run with asset classes such as high yield and emerging market debt although the latter has been significantly hit this year. But we know from history that the high yield market will turn and that is an important factor for our focus on illiquid investments.
The changes to the regulatory framework in the Netherlands are still not clear enough to make big investment changes to our portfolio on their basis.
Clarity is what the market needs now.