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On the Record: Does Brexit change your investment strategy?

APK Pensionskasse
Austria
Christian Böhm, CEO

• Location: Vienna
• Assets: € 4.5bn
• Members: 150,000
• Multi-employer pensionskasse with DB and DC/hybrid plans

We did not attempt to forecast the outcome of the British vote. But we did reduce risk ahead of the vote, predominantly by hedging currency risk. 

Now that the vote has been cast, we want to focus on the fundamentals for the economies of the UK and Europe. We feel that political developments are important, but at the same time we try to look at the underlying factors that may have an even larger influence on the economy. In the end, the direction of an economy is very much about people’s and companies’ individual decisions.

From that perspective, we do not believe there is one single possible path for the economies of the UK and Europe. Of course one of the key variables is how the future relationship between the UK and Europe will affect the real economy. Brexit will have an impact on political decision-making processes in the rest of Europe. But the UK is still part of an economic area that is heavily interdependent. The relationship does not cease to exist, it merely changes. In other words, we believe the impact of Brexit on the European economy, albeit negative, will not be disastrous. We are not prepared to downgrade the whole European economy because of Brexit.

In terms of asset allocation, we are still convinced that European equity has a potential. In fact, we believe that European equity is currently a less risky market than other developed market equity markets. This is one of our core views, and we think it holds for both the UK and the rest of Europe. Many British companies will not necessarily suffer, as they are have a global exposure.

We are watching several developments in the listed equity space. Certain sectors are of course under pressure. But, in general, we have not shifted our equity allocations away from any particular regions of Europe. We believe sector exposure is more relevant than geographical exposure at the moment. When it comes to fixed income, we believe we have to carefully check the risk factors affecting each asset class. It might make sense to look at higher-yielding paper, but the underlying risk may be too high compared with lower yielding asset classes. And yet, shifting from traditional European sovereign bonds to other areas seems a sensible approach. One asset class that does not look particularly attractive at the moment due to Brexit is, of course, UK real estate.

Ärzteversorgung Westfalen-Lippe (ÄVWL)
Germany
Andreas Kretschmer, CEO

• Location: Münster 
• Assets:  €11bn
• Members: 55,000
• Occupational pension fund for physicians in the region of Westphalia-Lippe

Historically, ÄVWL’s investment strategy has been based on fixed income, real estate and mortgage loans. This has changed in recent years, especially in the aftermath of the Lehman crisis. Unlisted infrastructure, including renewable energy, has become a significant part of our portfolio. We have further developed our strategy in the direction of real asset-based investments and project financing, ranging from real estate project developments to the financing of aircraft and cargo vessels. Along with this strategy, we have sought access in particular to the US dollar credit markets, which is important because infrastructure and asset-based investments are, to a large extent, US dollar-denominated. To do that, we moved away from full currency hedging and used the US dollar as an asset class in its own right. 

We are also keeping a high share of hard-currency emerging market debt, since the fundamentals of many of emerging countries look more promising than those of many of the developed countries. As a consequence, the US dollar exposure as of 31 May 2016 was about 12% of assets under management. 

In accordance with our anti-cyclical investment approach, we used the first signs of an overheated real estate market phase in the UK to divest some of our trophy assets in London during the course of recent years and months. Accordingly, it is not surprising that the ÄVWL is a net gainer of the Brexit decision so far and has profited from the US dollar appreciation which has, to a large extent, overcompensated the depreciation of a relatively moderate sterling exposure.

Apart from that, the long-term effects of the Brexit result are difficult to predict. A lot of the arguments are on the table, including capital flight in the face of large current-account deficits, a weakening economy, the unforeseeable consequences for the UK banking sector and the vulnerability of the real estate sector, to name a few. But other risk factors may not yet be in sight today. The only thing that seems to be arguably clear is that uncertainty remains high. Thus, the ÄVWL is not seeking additional UK or sterling exposure for the moment, except for opportunistic investments, if available.

For the next few years, the ÄVWL will strive to continue its focus on infrastructure (in particular renewables), asset-based lending and real estate. We expect thereby to become largely independent of market events such as Brexit and its consequences for the UK as well as for the euro-zone.

PFA Pension
Denmark
Henrik Henriksen, Chief strategist

• Location: Copenhagen
• Assets: DKK400bn (€54 bn)
• Customers: 1.1m
• Commercial pension provider

We have not yet gone back to the drawing board in terms of investment strategy. But we certainly have registered the Brexit vote and the political change that lies behind this vote. We started to reduce our relative allocation to equities more than three years ago, as we expected more volatility. At the time we were almost 100% exposed to equity risk in our high-risk portfolio, and now the allocation is lower. From that perspective, you might say that our portfolio was ready for Brexit, even though we did not expect a ‘leave’ vote in the referendum. 

I think we have to be very aware of the political winds which are blowing at the moment, not only in Great Britain, but also in Europe and the US, where more nationalistic and less trade and co-operation-friendly parties are gaining strength.

We are looking into these developments and we are also eager to spread our high-risk investments so they are not only focused on listed equities but also alternatives and real estate. Specifically, we are not keen on UK real estate, even though it is cheaper due to the depreciation of the pound.

Political risk often produces a lot of noise in the media that filters through to the markets. We do not want to focus too much on political issues. But from time to time we have to take it into account. Of the different directions the global economy can take, there is one where countries start to look at ways to stimulate their own economies at the expense of the rest of the world. If this is the chosen route, I believe the risk of stagflation becomes higher.

We have to bear in mind that listed equities will by far be the biggest portion of our high-risk portfolio in the years to come, but we are trying to diversify. One diversifier is real estate; we have been diversifying more globally in recent years. Other diversifiers are corporate bonds and emerging market bonds. We are still looking at alternatives, including infrastructure, alternative energy sources and investments in unlisted companies. We are trying to make sure our high-risk portfolio is only exposed to listed equities. Furthermore, after being underweight in emerging markets for five years, we are starting to look into this market in order to spread our risk, as emerging market assets start to show some strength. 

Interviews conducted by Carlo Svaluto Moreolo

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