Third-quarter returns of 1.4% by occupational pension funds in Portugal brought year-to-date returns into positive territory for the first time in 2016 – 1% for the nine months to 30 September – according to figures from Willis Towers Watson (WTW).

Returns for the 12 months to the same date were 2.6%, giving annualised returns of 4.6% for the three years, and 6.2% for the five years, to that date.

This compared with a 1.62% return for the first nine months of 2015 and a 2.75% return for the 12 months to 30 September 2015.

Performance figures were submitted by so-called closed funds, which are generally pension plans for a single employer or group of companies and which make up the vast bulk of occupational plans.

The WTW universe covers around €13bn in assets, which is 80% of the closed pension fund market in Portugal. 

It includes more than 100 pension funds for the nine-month and 12-month figures to end-September 2016.

It also includes the five biggest pension fund managers in Portugal.

The figures are based on median performance over each time-frame.

Gaudêncio Guedes, an investment consultant at WTW, said: “The third quarter was strong for equities in general, while euro-zone bonds also continued to contribute positively to portfolios.

“Emerging markets have delivered a very strong performance and confirmed what has been a year of recovery for this particular market, after a very troubled start at the beginning of the year. Asia, including Japan, also contributed substantially over the quarter.”

According to regulator ASF (Autoridade de Supervisão de Seguros e Fundos de Pensões), debt is still the single biggest asset in Portuguese pension fund portfolios, with 49% invested directly in the asset class as at 30 September 2016.

Of this, 31% was in public and 18% in private debt.

Direct equity holdings were 7%, while direct real estate made up 9% of portfolios.

A further 8% was in cash.

Investment funds made up 26% of portfolios, but the split between asset classes has not been published.

However, separate figures from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP) show 24.3% of pension fund portfolios in investment funds, of which 6.9% was in bond funds, 11.3% in equity funds and 4.5% in real estate funds.

The sample covered more than 90% of the Portuguese pension fund market.

Guedes said: “The bulk of most portfolios continues to be in euro-zone bonds, sovereign and corporate. Considering this, on average, Portuguese closed funds had a pretty decent third-quarter performance, even if less strong than for equities alone.

“We should also consider the trend towards high cash holdings in portfolios, exerting a drag that partly offsets the outperformance of other assets.”

Turning to strategic ways to improve performance, Guedes said: “Most closed pension funds are fully funded, or close to that, and this low-yield environment raises some tough challenges for management relating both to liabilities and assets.”

He said achieving a better match between liability and asset risk profiles was now quite expensive.

“What we have seen,” he said, “is a preference for bonds with lower durations to protect against an inversion in yields, while abdicating protection against any risk of a further decrease in yields, which seems very limited, given the already low yields.”

But he predicted that, this financial year, pension funds will have suffered a negative impact on their funding ratios as a result of further downward adjustments in the discount rates applied in actuarial valuations