Pensions In Austria: Funds take real risk
Real assets such as infrastructure are on the radar for Austrian institutional investors, finds Barbara Ottawa
At a glance
• Austrian institutions are looking at real asset strategies and taking more risk in bond portfolios.
• Low interest rates have prompted international diversification but some investors may be unintentionally adding to interest-rate risk.
• ESG is in high demand but is not without its critics.
“All multi-employer Pensionskassen are looking into infrastructure,” says Michaela Plank, principal at Mercer Austria. “Either they are seeking to increase their existing exposure or they are looking into adding this asset class to their portfolio.”
Martin Bruckner, group CIO for the Allianz Pensionskasse and provident fund (Vorsorgekasse), confirms that new asset classes will soon be found in his schemes’ portfolios. He says: “We are looking into infrastructure projects that can generate a stable, long-term cash flow in a regulated environment.”
Bruckner accepts that infrastructure always bears an idiosyncratic risk and points to past negative experiences of some investors – including the Allianz group – with state-regulated markets. But he adds: “When the state acts as a regulator rather than as a customer this brings stability.”
Sandra Hofer, head of institutional clients for Union Investment in Austria, also notes that infrastructure appears to be taking off after a long period of talk and no action. “Some clients have set up their own infrastructure departments and are investing in non-domestic infrastructure projects via specialised managers,” she says.
Regarding other alternative investments, Austrian Pensionskassen and Vorsorgekassen remain cautious, but a few sophisticated investors are investing into loan funds with boutique managers, according to Hofer.
Bruckner is unconvinced about most direct debt investments on the market. “So far I have not seen much that really generates higher returns than some fixed-income investments.” These approaches also bring additional administrative effort and cluster risk, he says.
However, even traditionally conservative Austrian institutional investors have slightly increased their risk exposure or shifted risk from government bonds to other fixed-income segments. Hofer confirms this: “Although the risk premia for corporates have come down considerably, the trend to increase their share in portfolios continues.”
Some investors have entered niche sectors: “They are looking into hybrid bonds or specialised corporates, but no investor has gone to the limits when it comes to risk,” says Hofer.
Plank also points out that there is a trend to increase risk in the bond portfolio, either by going into high yield or emerging markets, or both.
At the €5.4bn APK Pensionskasse, managing director Christian Böhm is sceptical about developments in the bond sector. He says: “The performance some have generated from exposure to government bonds from countries in the European periphery is over.”
He is also cautious when it comes to passive bond investing. “Many do not see that most passive bond indices are increasing duration along with governments issuing longer-term bonds – and that is a hidden risk,” he says.
“Those investors heavily overweight in bonds and have more or less ignored equities, now run the danger of simply trying to increase performance by increasing risk in the bond portfolio,” says Böhm. “The playground in the fixed-income segment is huge but sometimes investors are entering higher-risk zones within this segment and are not ready for these risks.
“We will see a similar interest-rate level for some years, if not quite as low. A low interest-rate environment does not mean there will be no economic growth. Growth happens in companies not in states. The current market environment may facilitate a decoupling of investors from state-driven low interest rates.”
Therefore, private equity is an important asset class for the APK, Böhm says: “Companies that do not have to report quarterly can operate differently than listed companies. But, of course, the private equity investment has to be based on a well-founded risk assessment.”
Surprisingly to many investors, volatility was less of an issue last year. “Last year political events like Brexit or Trump only disturbed the markets for one day – unlike previous years when political issues could cause serious market downturns,” says Plank.
Allianz seized the opportunity, according to Bruckner. “We were not too worried by the market downturn at the start of last year and were able to use it to buy some overweight in equities.”
This year he expects political risk to affect the markets at one point or another but he does not think it will be a permanent downturn. “If we have learned anything from 2016 it is that you cannot position yourself prior to political events – and you shouldn’t. Particularly in uncertain times it is important to get the overall allocation right and stick to it with a steady hand and cool head.” Bruckner recommends analysing “whether there have been fundamental tectonic shifts in the overall picture or not”.
Böhm takes a similar view: “You have to take an agnostic approach to things you cannot forecast. There are driving forces in this world that are not influenced by the political environment over the long-term as their momentum is often much stronger than politics.”
He confirms that APK’s outperformance in 2016 was mainly attributable to diversification and a global point of view in the portfolio. “We do not simply diversify the portfolio by investing in practically all asset classes available to us, but also by diversifying within asset classes – regionally or via different instruments.”
For Austria, Hofer notes a globalisation trend in portfolios over the last year or two. “This is of course down to the low interest-rate environment and the weak economic growth in Europe. And six months ago investors again started to show interest in emerging markets both in the equity as well as the fixed-income space.”
In the Allianz portfolios emerging markets have a “permanent slot both in the equity as well as the fixed-income segment”, according to Bruckner.
Böhm adds: “We must not underestimate emerging markets but it is also important to differentiate these countries and investments, for instance by looking at dependability on commodities or corruption.”
Looking at the future
What definitely has changed over the last two or three years, according to Hofer, is investors’ interest in environmental, social and governance (ESG) investment issues. “We get requests for shareholder engagement strategies as well as for ESG scores and CO2 analysis of portfolios.”
Hofer says most investors are still gathering information on these issues as well as their own exposures. Some large institutional investors with experience in the ESG sector have already started excluding certain investments, she says.
However, Böhm is sceptical about certain ‘fashionable’ approaches within ESG, such as carbon reduction: “The question is whether I really want to punish large energy producers, for instance, which have the potential to support the transition in the energy sector,” he says.
Plank adds: “From a client’s point of view, the companies are using us as consultant, I do not see much request for SRI/ESG investments. They are still primarily concerned with returns.”
However, those investors looking into ESG are seeking active asset managers, says Hofer: “Anywhere an investor is seeing true added value the price is not the problem.”
She continues: “Pressure on costs is extremely high in Austria as there are still many providers that are producing at low cost. Competition is also growing because investors are using passive instruments more. Many investors are mature enough to know which strategy fits which investment but some are overlooking the risks a passive structure can have.”