Best options to keep members happy

Judge’s comment: “Interesting options, with clear objectives for the fiduciary manager to help remove any doubt members may have when making their decisions”  

BPI Vida e Pensões (BPI) manages a suite of open-ended pension funds that cover different risk profiles. The funds are offered to small and medium-size companies as well as to private individuals as a means of accruing pensions benefits.

BPI’s flagship fund is BPI Valorização, which is tailored for investors with a moderate risk tolerance. This particular fund was launched in July 1993 and has a maximum equity allocation of 25% of total assets. Most investors in the BPI Valorização fund sign up to the feature that allows them to periodically transfer their membership and assets to other BPI open-ended pension funds with different risk profiles. While this is a feature that most members value, there is the risk nonetheless that short-term decisions taken by participants to move their assets in volatile markets and periods of stress could have an impact on the Valorização scheme’s long-term results.

At the heart of this winning entry is a demonstration of how BPI has addressed the need to keep portfolio volatility in line with member expectations and to instil confidence in them not to shift assets between funds, particularly when the equity exposure is at a maximum.

Current market conditions constitute an ideal example and present a challenge to those responsible for asset allocation. Monetary policy implemented by central banks since the 2008 crisis has resulted in a world where it is not easy to find value in broad asset classes, especially fixed income. But equities are also not cheap. For pension funds in charge of asset allocation decisions in portfolios with a long term investment horizon, BPI says it would be logical to conclude that portfolios should be overweight equities.

But experience demonstrates that investors’ short-term reaction to market downturns is to move their money, despite their long-term objectives, so managing this risk is central to ths fund’s success. 

The main solution BPI devised to allow Valorização to remain structurally overweight in equities while minimising volatility comprises using listed options as tactical overlays to its strategic asset allocation. Option strategies have several advantages in terms of managing risk. They offer upside potential while protecting the portfolio in negative scenarios, offering an insurance policy of sorts. Since BPI’s options in the Valorização strategy are long-gamma products, they offer the added benefit that they allow portfolios to more or less automatically adjust their exposure in times of adverse market movements.

BPI decided to use only listed options to avoid the counterparty risks associated with over the counter derivatives that would introduce yet more undesired risk. Ensuring full liquidity in the implementation of the options strategy was also imperative given Valorização’s nature as is an open-ended pension fund.

The market movements that usually trigger adjustments of this type come about rapidly with unforeseen events in a highly volatile environment. These are exactly the conditions that usually trigger short-term allocation shifts by members. With the option adjustments reducing volatility, members are discouraged from moving their assets to other, more conservative BPI pension funds. Managed internally to control costs, among other reasons, BPI began adding option overlays to Valorização’s equity portfolios in 2014 and to fixed income in 2015 to allow it to limit the downside potential from the lack of value in long-duration positions.

2014 Essentials

Fundo de Pensões Aberto BPI Valorização

Founded in 1993

Hybrid multi-employer open pension fund


  • active: 7,639
  • retirees: 936
  • deferred: 512

Market value: €166m

Performance as a percentage:

  • one year: 6.6
  • three years: 6.6
  • five years: 4.3
  • ten years: 4.1

Quick facts

  • Open-ended pension fund with 25% maximum equity holding
  • Innovative options overlays reduce volatility risk to retain member participation
  • Options cover equities and fixed income to protect against downturns


  • FP Multireforma Capital Garantido
  • Ocidental Pensões Open-ended Pension Funds