On the Record: Are you anticipating a European recovery?
Three pension funds - APK, Fondenergia and Pensioenfonds TNO - share their views about Europe’s recovery
APK Pensionskasse, Austria, Christian Böhm, CEO
• Location: Vienna
• Assets: €4bn (including Vorsorgekasse)
• Membership: 104,709
• Multi-employer pensionskasse with DB and DC/hybrid plans
“At the beginning of this year it was already clear that, from a valuation perspective, the European stock market was lagging behind the US. We saw that as an opportunity and reacted accordingly. I think we will see a recovery in Europe, though it will not be based on a strong foundation. We feel much of this recovery is priced in the markets already, and therefore we are bound to see more volatility in the coming weeks. We expect the euro/dollar rate will move in both directions. We also expect further volatility in the bond markets, particularly if QE contributes to bring back inflation. In order to offset that volatility, we have decreased the interest sensitivity of our portfolio.
Due to the intervention of the ECB and the political turmoil caused by the negotiations on Greek debt, valuation methods, particularly for bonds, are no longer very helpful. This is a challenging issue, and to address it we need to think about scenarios rather than rely on traditional methods. The other simple thing you can do to offset volatility and deal with uncertainty is to try and reach an optimal diversification level. At the same time, we need to assess the sensitivity of each of our assets to each scenario, and dig deeper into asset classes to find the best opportunities.
We believe that, to an extent, the Greek question has been priced in the markets, so the market might not overreact to either outcome. The real question is what is the future of the euro-zone.
On that basis, it is important to assess how real macroeconomic factors, energy prices, will affect different sectors of the European industry. Some interesting themes can be seen already. A lot of manufacturing seems to be coming back to Europe, and particularly in eastern Europe, as production costs come down and companies become more competitive. But even then, an investor needs to carefully consider the individual circumstances of countries and sectors.
Perhaps one of the advantages of Europe is that it is not a homogenous region. You have to look closely at which trends will be helpful and which will raise the risk factors. Look at European financial institutions: it is true they are riskier than in other regions, and that there are regulatory issues and several layers of cost in that industry. But because there will be restructuring in the sector, there will be winners and losers, and therefore opportunities.”
Fondenergia, Italy, Alessandro Stori, Director
• Location: Rome
• Assets: €1.7bn
• Membership: 39,958
• Italian pension fund for energy sector employees
“We are currently reviewing our strategic asset allocation, and the focus is, by and large, on looking for yield, given the anticipation that yields in Europe will stay low for some time. In order to achieve that we are aiming for more diversification on one hand and on moving away from low-yielding assets on the other.
These considerations, however, are not leading us to prefer European assets specifically. We will try to diversify on a global level. On that basis, in the reviewed strategic allocation we will try to maintain the positive performance of our European equity portfolio by integrating specialist strategies.
As we review our strategic allocation, we can take advantage of the recent regulatory changes in our country. In November last year, new rules on investments for pension funds were introduced that allow us to expand our portfolio to new asset classes.
Therefore, as well as reviewing our public equity portfolio, we have started a learning process, with the help of our consultant, on alternative investments in the private equity and debt space. We have already identified a number of interesting hypotheses, from mini-bonds to infrastructure.
Being a pension fund for the energy sector, we take a close look on how the oil depreciation is affecting our sector, and the prospects are not good. The oil price decrease is a double-edged sword because it affects drilling and refining at the same time. Therefore, we would try to be neutral towards the sector from a benchmark point of view.
But, in our view, the signals of a European recovery, at least from the Italian perspective, can clearly be seen. This is also partly thanks to political action.
However, I would not say we are positioning ourselves towards a European recovery in particular. The portion of European assets in our portfolio is already quite high, and we do not foresee change from that point of view. That is not to say our European assets have not performed well. They are giving us a healthy return, which makes up for the modest returns from our fixed income portfolio.
Similarly to our Italian peers, we began as an enhanced benchmark investor, with a passive tilt. We pay much attention to risk management as, ideally, we aim to have an asymmetric risk profile. But because this strategy is costly, we try and add a part of active management that will give us some alpha. For that reason, we think looking at the whole investment universe, rather than one specific region, is important.”
Pensioenfonds TNO, Netherlands, Hans de Ruiter, CIO
• Location: Rijswijk, the Netherlands
• Assets: €2.9bn
• Membership: 15,654
• Pension fund for employees of the Netherlands Organisation for Applied Scientific Research (TNO)
“We anticipated positive economic developments in Europe at beginning of this year, and as a result we are overweight European equities compared to US equities. This was based both on the macroeconomic picture but also on the valuation differential. That has played out quite well so far, and we are going to stick to that position. Our equity portfolio consists only of outsourced passive investments; therefore, there is no sector tilt.
Both for valuation reasons and because of the economic recovery in Europe, we have decreased our interest rate hedge to be in a better position when rates rise. This also has paid off well so far.
With regard to the fixed income markets, although obviously in the long term yields should stabilise at a higher levels, we do not expect this to happen soon.
The upshot in yields that we saw recently is probably due to a combination of technical trading and poor liquidity. Liquidity is poor in the fixed income market, but as long as the ECB is buying I do not think there is much room for a sustainable increase in yields. We do not expect a trend of rising interest rates, given how protracted the ECB activities might be. Still, because of the lack of liquidity, we might see further volatility in the coming months.
We are rebuilding our portfolio of real estate and private equity assets, but that plan is based on a long-term view and on microeconomic considerations, rather than macroeconomic ones. Those investments span across timeframes of around five years, therefore they are less likely to be based on a particular macroeconomic view.
We see the ECB’s QE programme having a positive effect. However, it is hard to say to what extent QE is driving the European recovery. Factors such as the depreciation of the euro and the lower oil prices are probably bigger contributors. Though QE improves sentiment, lower inflation and better exports are probably more helpful to a recovery.
In terms of risks, we see a danger that this aggressive monetary policy creates instability on financial markets, as asset prices become inflated.
In addition, the on-going support of monetary policy may lead governments to slow down their reform efforts, which are necessary for the European recovery to be sustainable.”
Interviews conducted by Carlo Svaluto Moreolo