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On the Record: What is the role of equities in your portfolio?

INARCASSA
Italy
Alfredo Granata, CIO

• Location: Rome
• Invested assets: over €9bn
• Membership: 170,000
• First-pillar fund for self-employed engineers and architects

“Currently, our equity allocation is up to 23%. In the last three years, our equity allocation has fluctuated, ranging between 20% and 25% of total assets.

The bulk of this allocation is invested using passive segregated mandates. We do allow managers to operate with a wide tracking error, but we prefer to have some active management on the top of the passive process, by investing in small rather than large caps, or by style management or including smart beta and so on.

We manage our equity investments in-house only where these are in the domestic market, meaning equities traded on the FTSE MIB (Milano Italia Borsa). All our other equity investment is done by selecting external mangers according to geography.

Inarcassa has a specific allocation to the Italian domestic market, and currently is between 7% and 8% of our total assets, and involves a basket of between 10 and 12 specific stocks. All of these stocks include leaders in the energy, industrial or infrastructure sectors. Up to now, there has been no investment made in the financial sector. Depending on what our involvement actually is with each company, we try to take an active role in the governance of the firms in which we invest.

We have an almost uniform geographical allocation. We are overweight in Europe, thanks to our domestic bias, whereas North America, Pacific and emerging markets, have an equal weighting in the portfolio, at 5% each of total assets.

In some cases, we make use of alternative strategies, such as smart beta or long/short approaches, but this is always through specific mandates. In our in-house equities management, we manage the total risk of the portfolio, so we often implement hedging strategies such as currency overlay or market hedging by using listed derivatives.

We do not foresee ourselves making any big changes to our current equity allocation, but we intend to increase our use of alternative strategies such as long/short or market neutral. As well as this, we will become more dynamic in the way we manage our hedging because we expect to see higher volatility and lower absolute returns over the next couple of years.”

Publica
Switzerland
Stefan Beiner, Head of asset management and deputy CEO

• Location: Bern
• Invested assets: CHF37.9bn (€34.7bn)
• Membership: 106,000
• Collective provider of pension plans for Swiss federal employees

“Our strategic equity allocation differs significantly between our seven closed pension plans and our 13 open plans, with the closed plans having a strategic allocation to the asset class of 10%, and the open plans having 29%.

However, in both cases, there is a 3% allocation to Swiss equities, and compared with other asset owners, our home bias is low.

In terms of our foreign equity allocations, the open plans have a 17% allocation to equities in industrialised countries outside Switzerland whereas this allocation is 7% for the closed funds. The open plans also have a 9% allocation to emerging market equities.

In our most recent ALM [asset liability management] process – January 2016 for the open plans and August 2016 for the closed plans – we decided not to increase our overall risk budget or our allocation to equities, under current circumstances.

The reason for this is that we think the probability of a recession happening internationally in the next three years is quite high. We don’t claim that there will be one, but the probability has increased. 

For the closed plans, keeping investment risk low is important. Firstly, there is legally no risk-taker and secondly, every seven years, the assets in those funds are set to decrease by 50% meaning that the economic situation of the closed plans is path-dependent.

It is possible that we would increase the strategic asset allocation to equities, if circumstances were to change. We monitor the most important ALM-inputs, which are the risk-return assumptions of the asset classes. The valuation could change, and if, for example, equity prices were down 20%, then we would reconsider our decision on equities.

We invest in equities via external managers, but it is part of our investment belief that few managers can select stocks successfully and achieve a sustainable, risk-adjusted performance that is above an efficient benchmark. 

Publica does not have the skills to identify these active managers and to invest significant amounts that way. So we invest time and resources in carefully identifying efficient benchmarks. Our implementation is rules-based with low tracking error.

We have customised benchmarks with low volatility elements and a value tilt, and we are currently reviewing including additional risk factors and tilts. We are considering the possible inclusion of size, dividend and momentum.”

Santander UK Group Pension Scheme Common Fund
UK
Antony Barker, Director of pensions 

• Location: London
• Invested assets: £11.3bn (€15.7bn)
• Membership: 63,000
• Corporate pension fund 

“We have a current target of only 20% to public equities and our exposure has been below that level for various reasons over recent years. At one point last year it was just 15%.

Although we have used option strategies, we tend to support the contention that if you don’t like a market you just shouldn’t be in it. We are not benchmark huggers, but we will take profits from our public equities portfolio if the exposure increases in value above the 20% allocation.

We carry out a monthly risk-model exercise on the portfolio and at the moment the greatest risk is in interest rates. In the past, equities have occupied a larger proportion of the overall risk than now.

So we have looked at ways we can diversify our risk – not just in equities, but other asset classes, predominantly private markets. In general, we have moved away from passive management to a global, unconstrained and longer-term value-driven active approach. This is part of a wider philosophy.

Our overall portfolio is effectively divided into two, where half is hedged to cover liability risks as much as possible and the other half is seeking returns. We know our deficit and the level of return we need to cover our liabilities to minimise capital impacts for the bank so, given what the hedge portfolio will deliver, the required hurdle-return calculation for the rest is mechanical. The challenge is finding the opportunities to deliver it consistently.

Now, 40% of the total fund is in private markets and real assets. This reflects our view that the 10-year outlook means it is possible to identify a portfolio of global growth assets successfully, but that these assets are not necessarily to be found within the potentially stagnant economies or flat public markets.

In our opinion, the value of equities and other asset types traded on public markets are likely to remain range-bound over the next few years.

Another reason we prefer private assets is because they allow us to be a genuinely active ‘impact’ investor, through the lot sizes we buy, for example. And although we are not primarily driven by ESG considerations, investing in private assets also gives us greater chances of success because with seats on, or oversight of, the board, we can help management make better decisions or stay focused on the agreed strategy rather than waiting for bigger problems to emerge later.”

Interviews conducted by Rachel Fixsen

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