The €268.5m Grupo CEPSA Fondo de Pensiones (CEPSA) has carried off the Best Spanish Pension Fund Award for its outstanding success in pursuing that elusive holy grail: high returns, combined with low risk.
The scheme combines the employees' pension funds for Spanish oil company CEPSA and its subsidiaries.
The fund's investment objectives are challenging, as it has been set a benchmark of obtaining a return of two to three points above Spain's consumer price index for its members and beneficiaries over a mid- to long-term time. In addition, this return must be achieved with a low risk profile.
So successful has this strategy been that by 30 June 2006, the fund had become the top performer in Spain, having recorded a 9.52% annualised return over five years and an 11.35% return per annum over three years, according to the Association of Investment and Pension Funds (Inverco).
Acquiring such sparkling results requires a disciplined investment process.
The fund's investment policy is drafted by its investment committee, which is made up of two executive members. They also sit on the fund's control commission, where they represent the fund's sponsor and its beneficiaries. The control commission has to approve the investment policy before it is put into practice. An investment committee then implements investment decisions.
On a day-to-day basis, research is carried out by a two-strong team, which reports directly to the investment committee. The committee also seeks advice from other members of the control commission, the fund's manager (SCH Pensiones) and external consultants, principally UBS.
In practice, the requirement to achieve an acceptable return with low risk has translated into a portfolio that is built around mixed fixed income funds, with equities restricted to a maximum of 30%.
A key aspect of the investment policy is the existence of exhaustive guidelines for risk control and investment selection.
Each type of investment is limited to a percentage of the fund's total assets, which ensures a limited risk exposure as well as a well-diversified portfolio. The resulting asset distribution is 10-30% direct equities (with a 5% ceiling on non-euro investments), 35-85% fixed income (euro investments only), 5-15% principal-guaranteed equity products and convertibles, and 0-20% real estate (euro investments only).
Within these overall parameters, the investment policy contains strict rules for individual holdings to ensure that stock-specific risk is kept to a minimum.
When the fund buys equities directly, it acts as a value investor and uses a stock-picking approach, so it does not track any index or benchmark.
The aim is to hold investments on a mid- to long-term basis in very solvent companies, with stable markets and a history of positive earnings. In addition, companies should have low volatility.
Entry levels for shares must comply with a limit on the p/e ratio (based on recurrent earnings) and there is a similar objective for the portfolio as a whole.
In addition, companies must have a minimum rating, to ensure their solvency. If no rating is available, they must comply with a limit on leverage.
The market capitalisation of the companies in which the fund invests must be above an established minimum. In fact, the companies are generally members of their respective market indices.
Companies must also have limited risks, good management and a favourable earnings outlook. As a result, the fundamental variables and relevant ratios have to be researched both by sector and by company.
Across the equity portfolio as a whole, there are minimum dividend yield requirements.
All this has helped produce a glittering performance from direct equity investments, with a return of 39.7% in 2005 and of 12.2% for the first half of this year. Furthermore, this has been achieved with low volatility; the average beta ratio of the fund's equity portfolio is just under 0.85%.

Meanwhile, at 20% the maximum allocation to real estate is fairly substantial, and there are also rules for investing in this asset class via direct holdings in quoted companies. Where stocks are bought for this purpose, the major part of the companies' business must be in rental activities. There is a maximum investment exposure for each company, which varies according to their discount to net asset value. In addition, any direct investment in buildings requires the express authorisation of the control commission.
The policy stipulates that convertible bonds should preferably be invested through specialised funds. There are also guidelines for investing in principal-guaranteed equity products.
For the fixed income segment of the portfolio, minimum ratings apply when selecting particular securities and maturities are set as a function of interest rates. This ensures high solvency and a balanced return over time.
Overall, the fund has gone from strength to strength this year. Its year-on-year return as at 30 June was 7.32% and over the year to 31 August it returned 6.18%.

Highlights and achievementsThe CEPSA pension fund has achieved superb results with relatively low risk by establishing a clear-cut chain of command in the decision-making process and a well-defined investment policy intended to reduce portfolio volatility, which is carried out to the letter. All this is put in place in a streamlined way by a relatively small investment committee and research team.
The different asset classes within the portfolio are limited to individual ranges, and while the fixed income portion dominates, direct equities can make up to 30% of the fund. There is also scope for substantial real estate holdings.
The fund invests in equities on a stock-picking basis, with stringent hurdles for potential investee companies. These include limits on the p/e ratios, threshold levels for market capitalisation and minimum solvency ratings.
There is also the requirement for good management, stable markets and a favourable earnings outlook.
The fund's investment philosophy and procedures have been fully justified by returns which place it among the top performers in Spain, and in first place over the past five years.