On the Record: All eyes on equities
What is your outlook for 2013?
Blue Sky Group
• Invested assets: €16bn
• Fiduciary manager of several Dutch DB pension funds including that of KLM
• Members: 90,000 participants and pensioners
• Funding ratio: General pension fund 116.6%, pilot scheme 126.9%, cabin crew fund 115.9% (all year-end 2012)
Our consensus on economic growth this year expects 5% growth in emerging markets, 2.1% in the US and 0.2% in the EU, with the latter improving towards 0.9% at the end of the year.
We come from a very fearful outlook and everyone continues to be nervous about what is being communicated to markets. However, our consensus view is that this can be relaxed, as fundamentals are pretty strong.
But if the situation surrounding the US fiscal cliff deteriorates, if the EU cannot move on with current policy-making, or if there is a deterioration of geopolitical risks – for example more instability in the Middle East – they could become a game changer.
We have agreed that the consensus outlook would not hold in such an event and we would have to come back to the table and discuss it.
In other words, we expect 2013 to be a moderate risk-on year with caution, which is why we favour higher-yielding assets. Despite some expected low volatility in equity markets, equities are still the favourite position to hold at the moment, whereas sovereign bonds, specifically sovereign European bonds, are much disliked from an asset-only perspective. However, with the constraints placed upon pension funds, we will probably have to continue to hold a lot of German and Dutch sovereign bonds still, albeit in an underweight position.
For 2013, we prefer high-yielding fixed-income instruments such as emerging market debt but we also like emerging market equities and currently favour European over US equities.
We also like to spread our assets globally – for instance, through global equity mandates – to give managers the opportunity to move from countries with a poor outlook to ones with better prospects. In a globally-diversified portfolio, unlisted real estate and private equity will give us access to cashflow as well as the highest returns due to their illiquidity premium.
In the Dutch context, there is a lot of discussion on how to manage pension assets in the future, both towards the appropriate governance structure and the eligible investment instruments and techniques as well as the future of pension arrangements. That puts a lot of pressure on trustee boards and ultimately where we would like to position ourselves. We have always debated whether we should diversify more or less away from the euro and what hedging positions to hold on interest rate risk, particularly since the introduction of the ultimate forward rate.
• Invested assets: €3bn
• 23,000 companies as clients, 450,000 individual pension contracts
• Industry-wide scheme for employees in the metal industry with DB and DC plans
Our pension fund offering consists of four occupational different pension fund vehicles – insurance, Pensionskasse, Pensionsfonds and support funds (Unterstützungskassen).
We do not run our own asset management strategy for any of the insurance-linked pension vehicles. Instead, we receive an arithmetically calculated average interest rate for them from our insurance partners. Due to the support of our sponsor and the state, I expect those vehicles to continue to generate a stable return despite the low-interest-rate environment.
There is no need to turn the low-interest-rate environment into an angst-ridden scenario. While the risk is ongoing, it is controllable and in the vehicles where we can do this, we steer it through our asset allocation.
In our Pensionsfonds, we will focus on net asset value in 2013 – in other words, we will run a relatively equity-heavy strategy.
We aim to maintain equity exposure of over 50% in the Pensionsfonds this year at the expense of sovereign bonds, particularly European ones. At present, exposure to equities is even higher at 79%.
We believe that equities will be most beneficial to our members in the Pensionsfonds, although we are always prepared for unexpected, exogenous market shocks and are able to exit overnight.
If the markets caused us any major problems, our risk overlay would come into force. But, for the moment, based on market projections, we are optimistic that we will generate a good performance with our equities exposure without the risk overlay. We are working on a pre-balancing, which allows us to have a target equity exposure of 70% or 80%.
The investment strategy of the Pensionsfonds is a result of the recognition that we need to position ourselves more broadly among the different asset classes, such as alternatives. However, due to our socially responsible investment (SRI) strategy in the Pensionsfonds we have so far been reluctant to invest, for example, in commodities. In the current environment, the German employee has a strong need for security. We want to fulfil this but at the same time avoid that young employees go into pension vehicles that cost them too much money.
For that reason, in 2013 we want to continue to set the Pensionsfonds apart from the more conservative insurance-based vehicles and show that it can handle crises over a long-term investment horizon.
Torben Möger Pedersen
• Invested assets: DKK137bn (€18.4bn)
• Members: 629,000
• Industry-wide DC scheme
• Companies insured: 26,000
• Solvency ratio (core capital divided by solvency requirement): 215%
In their outlooks for 2013, the International Monetary Fund and the OECD expect low growth. While this might be the case, at the same time there is also a risk that Europe will slide into another recession, with negative consequences for its people and challenges for its pension funds, which will have to manoeuvre in an environment of low interest rates and volatile equity markets.
Therefore fundamentals remain quite important to us in our investment strategy.
Our main risk scenario is that Europe may have started on a Japan-like path where fiscal austerity policy and lack of business competence will keep the continent on a no-growth path for a decade or so.
However, we were more concerned about this six months ago than today. I think that the European Central Bank initiative has been quite positive and we hope governments, the German government in particular, will accept the necessity of having less of a focus on fiscal balance and more focus on the need to promote growth and employment.
The deal reached in the US Congress on the so-called fiscal cliff has, in the short run, the potential to bring the US economy back on track regarding growth and job creation during the year. That said, the looming clash between the Democrats and the Republicans over raising the $16trn (€12trn) debt limit could destabilise the progress made so far.
We have decided to construct a solid anchor in the portfolio consisting of infrastructure and real estate investments to compensate for the low yields on bond investments. Around 10% is allocated to real estate, while another 10% is invested in direct infrastructure investments.
The reason we are looking at infrastructure is because of the new challenges facing the financial industry. There is a need for large-scale investment in renewable energy and infrastructure. Investment in offshore wind parks in North West Europe over the next five years is estimated at €125bn but the high levels of government debt in many countries have made it difficult for governments to finance these projects. At the same time, because of the banking crisis and the new Basel III regulations, banks cannot provide these projects with long-term finance. So there is a need to develop alternative sources of capital and new means of financing large-scale infrastructure projects.