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Stress-tests build confidence in future funding levels

Founded in 1968, Amonis is the professional pension scheme for Belgium's doctors, dentists and pharmacists. It is a hybrid defined benefit and defined contribution structure with €932m under management for some 23,300 active members and 3,500 pensioners.
Amonis entered the IPE Awards on the back of its confidence in the way it constructs its portfolios and its success in investing in commodities and hedge funds - burgeoning investment classes for pension schemes.
Amonis says it began by engaging in a project to develop an in-house model to determine the optimal asset allocation it needs to adopt based on the structure of its liabilities.
The notion of liability matching is one of the most talked-about development in Europe's pension scheme landscape and is becoming as important as the traditional pension fund driver of growing assets. "The concept of liability-driven investment is embedded in Amonis's corporate strategy and provides a model for determining the fair value of our liabilities," the scheme says.
To determine the value of the liabilities, Amonis begins with a discounted cash-flow model and then turns to its investments, which it says it analyses thoroughly. "We model the geographical spread of each asset class and break each down to style and level of capitalisation. This means we consider factors such as value versus growth, small caps versus mid-caps and large caps. We also run an active currency overlay programme. We consider currencies as an asset class in their own right and model them as such. We then consider their effect on the overall portfolio," Amonis explains.
Next, the fund looks at its alternative investments in hedge funds and commodities and models them into the strategy, taking full account of the tail risk they carry. Tail risk is a form of portfolio risk that arises where the possibility that an investment will move more than three standard deviations from the mean is greater than that shown by normal distribution.
With specific regard to its bond portfolios, Amonis says it models them using Nelson-Siegel-type equations for future interest rates. The Nelson-Siegel model is a mathematical means of tracking and measuring yield curves for fixed income investments. Amonis uses the same model to calculate its liabilities, since these are mainly valued against bonds. "This gives us a consistent and integrated view of both our fixed income portfolios and our liabilities," Amonis comments.
Essential to the Amonis approach is the creation of stochastic correlation matrices. This means looking at random and variable correlation in a controlled environment so that Amonis can act on any negative impact market events may have on its portfolios. "We do this to stress-test market shocks and subsequent recovery periods."

To illustrate the idea, Amonis says that in a steady state, it observes a normal correlation matrix with the essential correlation features between asset classes that investors expect to encounter. "What we generally observe during periods of crisis is how the correlation rates change, all basically moving to a correlation of one on the scale." During the time following these shocks, Amonis says it anticipates a recovery or return to normal correlation rates spread over several different time periods. "We can simulate different shocks, such as the catastrophic and panic sell-off that follows a major event like the notorious 9/11 terrorist attacks on New York in 2001 or shocks generated using certain economic scenarios, such as extreme interest rate hikes," it adds.
Amonis says this allows it to undertake effective stress- testing of its portfolio using almost real market situations and thus to determine its economic and capital needs, future funding requirements and embedded option values. It enlisted the services of specialist Dutch asset liability modelling firm Ortec, not only to develop these concept but also to help put them into practice.

Highlights and achievements
Amonis's project to develop an in-house asset allocation capacity is bearing fruit, as this award proves. Good risk management and solid investment performance go hand in hand.
Amonis's stress-testing not only centred on simulating market crises and their impact on its portfolios, but included a comprehensive and extensive correlation measuring programme that enables it to keep its investment strategy stable. But Amonis's focus on testing is not designed solely to supervise the performance of its investments, but allows it to keep an eye of projected funding levels and future liabilities.
Its focus on liability matching has also allowed it to understand how bonds have come much more to the fore, as liabilities are valued against bonds.

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