Andrejs Landsmanis of Sweden’s AP1, Mariette Simons of the Netherlands’ Pensioenfonds SNS REAAL and Hans Wilhelm Korfmacher of Germany’s WPV explain their approaches to tactical asset allocation.
Andrejs Landsmanis, head of asset allocation
• Invested assets: SEK227bn (€26.3bn)
• The first of five Swedish national pension buffer funds
• Solvency within the pension system is calculated on a yearly rolling basis and benefits are calibrated according to available assets
• Established: 2001 under the new system but the fund’s origins go back to the original set-up in 1960
We believe that price and value are very important determinants for the returns that assets can generate. Therefore, a part of our investment philosophy is based on capturing any perceived mismatches between price and value.
For an investor, one big risk is to overpay for an asset. Because of this risk, we engage in efforts to do market timing.
However, we are not principally engaged in tactical trading on short-term movements.
In a broader sense, we do not think that our returns would be improved by tactical asset allocation when used as a trading activity.
But we can improve on returns if we manage the timing of market entry and exits.
The decision on entry and exits is made at all levels of the portfolio – equity, currency, fixed income and alternative strategies.
On a more aggregated, strategic level, we try to understand if, for example, interest rates are very high or very low, or currencies are under or overvalued in order to get a better structure in the portfolio. But changes in our risk profile take time. So even if the question is always on the agenda, it does not necessarily lead to action all the time.
We believe that our approach has created a more consistent view of our mission and our portfolio, and this is important for us as a long-term investor.
However, we have not measured our performance in the context of excluding tactical asset allocation, when defined as a trading or momentum-driven activity.
Traditional tactical asset allocation is fundamentally about forecasting short-term moves in the market. From a broader perspective, there are times when nothing really happens in the market. Furthermore, markets can seem more or less stable for a short-term participant but the events or misalignments that call for action do not occur that frequently in the market.
We find it hard to believe that market participants in general are good at forecasting short-term moves and we find it less important in terms of strategy for us.
In our view, trading can never compensate for, or cover up, a weak balance sheet or weak strategies.
Pensioenfonds SNS REAAL, Netherlands
Mariëtte Simons, director
• Invested assets: €2.35bn (end-September 2012)
• Members: (at 2011) over 22,000; over 9,000 active
• CDC: Collective defined contribution
(conditional DB with conditional price indexation)
• Funding level: 117.7% (end-September 2012)
• Established: 1997 as Pensioenfonds SNS Bank for SNS Bank employees, in 2004 as Pensioenfonds SNS REAAL
To us tactical asset allocation falls into two categories. Firstly, tactical asset allocation occurs where we see extra return possibilities. This is undertaken by our delegated investment manager because we think as he is operating in the market he can recognise those opportunities better than we can. As a pension fund and investment committee, we do not look at individual investments – instead we concentrate on policy, the guidelines and our investment beliefs. The decision on whether to invest in one company over another is made by our asset manager.
We do not have an active policy on tactical asset allocation to seek extra returns because we believe in efficient markets, especially in the non-emerging markets. In emerging markets we mainly invest in investment funds so again the tactical allocation decision for extra return possibilities is with the asset manager.
The other driver of tactical asset allocation is risk allocation, which in these uncertain times may be more important than the search for extra return.
There has been a major change for us with regard to the allocation of risk in recent years. Of course three years ago we took risks and risk allocation into account. However in those days, we did not drastically change our asset allocation.
In September 2011, we decided to change our risk allocation and have been working on it since. We started a new ALM study recently where we focus on risk and risk allocation prior to asset allocation.
In other words, for us, tactical asset allocation has been changing from a mechanism that seeks opportunities for extra return to a mechanism that reduces or increases risk when needed, particularly with regard to interest rate risks.
If we look at our asset allocation from a risk perspective, we see that we have some correlation between different asset classes, such as equity and debt, because they have the same risk drivers.
Tactical asset allocation in risk management or risk acceptance is prepared by our internal investment committee, with the board making the final decision.
We evaluate the risk positions somewhere between a monthly and a quarterly basis.
Hans Wilhelm Korfmacher, managing director
• Invested assets: €2bn
• Industry-wide pension fund for auditors and chartered accountants
• Hybrid of DB and DC
• Established: 1993
Because the capital markets have become more complex and we find ourselves in a low-interest environment, tactical asset allocation has become much more relevant than it was in the past.
It has become a lot more difficult to deal with the challenges we are confronted with, and it is impossible to generate our target return with the classic asset classes which, in the past, used to make up 80% or more of the overall asset allocation of pension funds and insurance companies in Germany.
Therefore, we need to think much more carefully about what asset classes we invest in and in what part of the cycle we are in with the various asset classes.
Our strategic asset allocation is a result of an asset liability management study, which sets certain bandwidths for the various asset classes to our board.
At present, WPV’s asset allocation consists of around 60% fixed income, allocated to core government bonds, covered bonds and hold-to-maturity privately placed instruments with a focus on ‘solvency-zero loans’, while the other 40% is managed like a multi-strategy fund of funds, holding a mix of emerging market debt, corporate bonds, equities, real estate and alternatives.
To move within the bandwidths, tactical asset allocation has always played an important role for us within all the asset classes but its application used to be simpler. In the past, we were able to principally reach our goals with our bond investments alone.
But today, we need a lot more resources to meet our return targets. This has meant that tactical strategies have become more important and tactical asset allocation is undertaken on a much broader basis.
However, for us, tactical asset allocation means finding the right time to enter an asset class and underweight or overweight it according to market trends and cycles. Because WPV is a long-term investor it does not mean day trading or investing according to short-term market timing.
Our tactical investment strategy has to be in line with our risk management strategy, in other words our risk budget, balance sheet accounting dates and risk capacities, which we have to adhere to.
Because tactical asset allocation is a constant part of the investment process for WPV, it is undertaken in-house and not externally via an overlay mandate.