On the Record: How will your equity exposure change this year?

Tom Mergaerts, CEO

• Location: Brussels
• Assets: €1.85bn
• Members: 27,500
• Supplementary pension fund for the healthcare sector

The current allocation to equities is 24% of the portfolio but the overall exposure to equity risk is 30%. We allocate to European equity, both large caps and small & mid caps. We also have allocations to Japanese mid caps, US small & mid caps, emerging market and global equities. Finally, we invest in real estate equities and have a relatively small allocation to non-listed infrastructure equity. The global equity allocation is the largest compared with the other equity-sector exposures, followed by real estate equity and emerging market equities. 

All portfolios, but one (which consists of European equities), are actively managed. 

We will change our equity exposure if the situation requires it. Today the exposures are more or less coherent with the strategic asset allocation (SAA), which will be revised during the first quarter of 2017. Events on a global scale, such as the economic and political evolution in the US or the fate of Syria or Russia, may affect the SAA.

In terms of sector and stock selection, these are the duty of the external asset managers, rather than our board. We plan, however, to implement an ESG overlay on portfolio-wide basis, which may affect the sector allocation within our equity portfolio.

Similarly, we leave the task of identifying value to our external portfolio managers. In active management, freedom is given to the managers to find value within their domain. Whether they do find value is up to their expertise and quality. From a high-level perspective, I think value can be found in renewable energy, utilities and infrastructure, as well as technology and biotech.

When it comes to risk management, we apply a ‘minimum risk’ approach, on top of the bottom-up process, to some of the equity portfolios. This is the case for emerging market equities. Otherwise, we consider risk on a portfolio-wide scale, using factor-risk monitoring in an overlay fashion to monitor overall portfolio risk. In particular, our approach follows an integrated asset-liability factor decomposition process. We measure the factor risk attribution to both the asset and the liability side, and look at the risk-factor mismatch between both sides. This way we get a measure of surplus at risk, which is used as a steering parameter.

Alessandro Stori, Director

• Location: Rome
• Assets: €2bn
• Members: 40,000
• Second-pillar fund for energy sector employees

Fondenergia had €680m, about 34% of the portfolio, invested entirely in listed equities at the end of 2016. There is no allocation to private equity. The scheme offers three investment funds, each with a different risk profile. The guaranteed fund has a 5% allocation to equities, while the balanced and dynamic funds have 33% and 52% allocated to the asset class, respectively. 

Equity risk contributes significantly to the funds’ volatility. It is responsible for 75% of the guaranteed fund’s volatility, while the impact of equity risk on the balanced and dynamic funds is 82% and 95%. Target volatility for the three funds is 1% (guaranteed fund), 4.8% (balanced fund) and 7.2% (dynamic fund). From a geographical standpoint, we invest mainly in Europe, both in the euro-zone (60% of the portfolio) and the rest of the continent (12%). The remaining 28% of the equity portfolio is invested in North America (21%) and emerging markets (7%). 

Concerning the currency exposure of the scheme’s overall portfolio, we ask our managers to maintain a 75% minimum exposure to the euro. In general, diversification is higher within the balanced and dynamic funds. We have active management within our strategy but we ask managers to keep tracking error within limits. For the time being, we have no smart beta strategy. 

We recently reviewed the strategic asset allocation (SAA) of the portfolio and renewed our mandates. Since June 2016 the funds are managed by 11 firms, some of which have specialist expertise. In building the SAA, we considered the return outlooks for individual asset classes and increased the diversification of the two major components of our portfolios, bonds and equities. I therefore expect the current exposures to be maintained during 2017, both in terms of equity risk and currency risk. We want to see how the new SAA works overall.

A specialist manager oversees the equity risk we carry, applying an actual overlay strategy on underlying portfolios by using derivative instruments. This applies to both the balanced and dynamic fund. We have gained experienced in this area, having run the overlay strategy for more than six years. It is a costly strategy, but it offers an opportunity that is difficult to refuse.

UMR Corem
Philippe Rey, CIO

• Location: Nantes
• Assets: €8.6bn
• Members: 401,936 
• Mutual pension provider

We currently allocate 19% of the portfolio to public equity, while 3% is invested in private equity. The breakdown of the allocation to public equities is: Europe, 55%; US, 30%; Japan, 5%; emerging markets, 8% and others, 2%. More than 90% of the equity portfolio is actively managed. During 2017 we plan to leave our allocation to equity unchanged. We are already overweight in the asset class, which reflects our positive medium-term view of equity markets in general. Concerning public equities within our fund of fund strategy, we maintain our equity exposure close to 100%, with an overweight position in European markets and a preference for euro-zone markets. 

We have maintained, for several months, a more pronounced bias towards value management, including high dividend-type strategies that remain current in an environment of low rates. Three main factors contribute to this choice: a favourable economic momentum in Europe; improved growth trends in corporate profits; and a continuing strong momentum in mergers and acquisitions.

In private equity, UMR invests principally in small and mid-caps funds, including primary and secondary transactions, and directly in European companies. We have always considered diversification as key for performance, and therefore included GPs in the large buyout area and in the mezzanine segment. We have also invested in venture capital funds. The operating metrics of our various funds reflect the success of our investment philosophy. 

Our conviction in the small and mid-cap listed equity segment remains strong. Despite high valuation levels, we believe the US market still offers good prospects, given the dynamics of US companies. Furthermore, US President Donald Trump’s tax policy may lead to an increase in share redemptions. 

In general, we maintain a positive bias towards value approaches, for reasons of valuation and momentum. Within emerging markets, Asia and especially China continue to offer interesting prospects. They seem to be neglected because of the lack of visibility of the Chinese economy but their valuations are very attractive. 

In terms of risk management, our investment strategy is based on in-depth knowledge of our liabilities which are calculated using stochastic modelling every year. We define risk budgets and limits and monitor technical indicators for tactical movements.

Interviews conducted by Carlo Svaluto Moreolo

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