John Lappin looks at how European investors stood firm in the crisis
The Asian crisis gave rise to a flurry of selling activity but the reaction of pension funds, particularly those intent on maintaining a detailed strat-egic asset allocation, was significantly more muted.
As Reto Kuhn manager of the Zur-ich-based Swissair fund explains, We have a mandate with SBC Brinson for our global equity portfolio and Asia is just a part of that. Asia has a 30% fixed share of the portfolio. We do not alter this amount. It is a strategic decision."
This 30% allocation, agreed with manager SBC Brinson, is currently set at Hong Kong 5%, Australia 7.5%, Japan 7.5%, Singapore 5% with Malaysia and Thailand both at 2.5%.
"We are strict. We don't move away from this benchmark. If the market goes down as in Malaysia and Thailand we buy and if it goes up then we sell. It is a quite simple universe ap-proach," he adds.
Karel Stroobants, deputy general manager of the Brussels-based Caisse de Prévoyance des Medecins (CPM) strictly maintains the fund's regional allocation but within this the manager has more freedom. "The manager always has to be 100% invested but within certain margins he has considerable freedom. For example he is allowed to have a 0% rating in a particular country," he says.
The fund does not get involved in allocations based on market timing but maintains what Stroobants calls passive tactical asset allocation. In effect, he expects to provide more money for the region to meet his 10% investment allocation because of re-cent market falls. Similarly, if things were going well, the fund would sell.
However most funds give their managers the freedom to vary asset allocations across a region, or within global portfolios and this will have brought a change in asset allocation. One manager of a major regional fund said that the managers of global and emerging market funds were moving funds out of the region and that regional funds were themselves moving towards what he termed the 'safe haven of Northern Asia' particularly Greater China and away from the problem markets of the Philippines, Thailand, Malaysia and Indonesia.
The approach funds take to Asia varies according to fund size, the stage of development and the degree to which a fund involves itself in specific asset allocation. The most important change is the move by many European funds to diversify internationally with Asian investments an important part of this process.
The proportion of assets allocated to Asia varies. Funds which have built their international holdings by employing region-al mandates have a clear idea of the proportion of assets they wish to see invested. For other funds, investments in Asia come about as a result of a combination of investment ap-proaches which mix direct investments with the use of funds and external managers with the freedom to allocate funds across global or emerging market portfolios.
The definition of what constitutes Asia also varies with some funds in-cluding Australia for example while others clearly divide the region be-tween developed and developing countries.
Where funds delegate country weighting decisions to managers, there has been a move to Greater China comprising Hong Kong, China proper and often Taiwan but other funds are content to maintain existing long term allocations even to the extent of increasing funds available to maintain a set presence in a market despite the recent collapses.
Examining the broader European picture, Vivienne Carnt of the William Mercer investment consultancy in London says: "We have re-cently seen several pension funds looking at Asia for the first time. If there is a trend towards diversification then the first step is global and the next step is to break that down into regions.
"Of course, it is a question of size, experience and comfort, and the more advanced pension funds are the most active."
She believes that the new pension funds coming on line in Europe should be moving into Asia in the next two to three years, spurred particularly by the need to provide options for defined contribution plans.
However Nigel Ledeboer, international client investment services manager at HSBC Asset Management in London believes that this process could develop further through the use of country funds, particularly in the case of Greater China including Hong Kong and in some cases Taiwan. This will, once again, depend on the stage of development of the organisation.
To date, European pension funds are heavily weighted towards the Northern Asian markets when their overall strategy allows them to do so, but have not yet got to the stage of using country funds.
Ledeboer, looking to other trends in Europe, adds that before the latest market collapse, he had seen signs of increased German institutional interest in investing in the region. Spain is just at the initial stages of building its
international holdings while, in general, Dutch funds seem reasonably happy with investment through regional funds.
CPM has a very structured approach to its international development, a process it began in 1995.
"We decided to execute the ideas of the modern portfolio theory: investing in non-correlated regions," ex-plains Stroobants.
The fund, given its size-large by Belgium standards but not by international ones - has divided the world into regions: Belgium, Europe, Em-erging Europe, North America, Latin America and Japan.
The first regional investments were made in Europe but Asia was the next priority and now 10% of the fund is invested there. Stroobants also be-lieves that having a manager based in Asia - the fund's Asian manager is based in Hong Kong - has helped to add value in the light of great cultural differences and the fact that change in Asia can happen very rapidly.
Klaus Kirchenhofer, head of portfolio management at the DM1.8bn ($1.02bn) Wacker Chemie pension fund in Munich, which is also increasing its international diversification, says the fund's strategic aim is to hold 5% of its assets in Asia. It currently invests 1% or about DM20m of its assets as part of the passively managed Financial Times global equity index.
As part of this process the fund is due to appoint a manager for a Pacific basin mandate with what Kirchenhofer says is a very short shortlist.
He says: "We split Asia between global emerging market holdings and the developed Pacific basin. We count Australia, New Zealand, Japan, Hong Kong, Singapore and maybe Malaysia as the developed countries and these will make about 25% of our Asian holdings although we haven't decid-ed this finally. In all cases we want to avoid any overlap with the emerging market mandates."
For Stroobants the divisions are simpler: "We do the regional asset allocation, then we look for a manager with a bottom up style. For the South East Asia region, we looked for a manager who had capabilities as a stock picker but who also considered country allocation in that region, something we don't do."
The Dkr25bn ($1.68bn) Laegernes pension fund based in Copenhagen has a similar approach to regional divisions, although its use of funds means this is slightly more complicated than that employed by CPM.
Chief investment officer Claus Stampe says that of the three external managers investing in the region, two utilise unit trusts as part of the construction of a global portfolio which is heavily overweighted in Asia.
He says: "The portfolio is split up on a geographical basis such as Europe, Japan, the Far East and we do the allocation for different regions.
"At the moment we have about 8% of our total foreign equities in Asia but more than half of that is in Hong Kong. We look at Asia on a regional basis so it is up to the managers how they do the country allocation."
The British Airports Authority (BAA) pension scheme also presents a more complicated picture. Out of the fund's three external managers, one covers UK equity, one manages an international index tracking fund, and third provides balanced management globally.
The major variations are therefore provided by the third manager who invests in all regional markets, the US, Japan, the Far East and Europe. There is an allocation to Asia in the Far East element. "We would usually have direct exposure and that is because we feel comfortable given the size of the fund," says Eric Hunt, group pensions manager at BAA.
He continues: "The only exception to that is for worldwide emerging markets where we use a Fidelity managed OEIC. But it is simply a packaged way of doing it."
He continues: "Fidelity by style are a bottom up stock picker so the asset allocation tends to emerge from stock picking rather than a top down approach so they really have a pretty broad opportunity to structure it any way they wish. There are obviously maximums and minimums but the minimum is zero and the maximum is pretty large."
Two Irish funds, the Guinness Ireland fund and the Construction Federation Pension fund - in what is a reflection of their more limited size - leave all such international allocation decisions to their external manager, Bank of Ireland Asset Management (BIAM). In both cases, while close attention is paid to BIAM's performance, the funds do not get involved in any other investment decisions.
Indeed performance, as would be expected, remains the main criterion in manager and fund selection.
The equity manager of one large industry-wide Dutch fund, which uses external mandates for all managers, says: "The criteria are almost the same, worldwide. We look at past performance, we look at investment style, we look at the organisation of the manager. Once that decision is taken the manager has extensive freedom.
"We give a mandate for the whole region: that is the Pacific including Australia but excluding Japan, but in principle the manager has the freedom to allocate to a different market,"
But while giving those managers including those in Asia considerable freedom, he also warns "If we don't agree with his investment style or approach, I think we will simply hire another manager.""