The EU has been good for Portugal, but will the Euro be roses all the way for the pensions and investment sector? Hugh Wheelan reports from Lisbon
During the Portuguese revolution in 1974 the people handed each other roses and red carnations as they danced in the streets.
The image perfectly encapsulates a passive but committed people to affairs of state, but a population unlikely to take to the barricades at the first sign of great national change .
Just over 10 years later the country had long since left behind its ‘velvet’ socialist resurgence - a new young market economy was finding its feet and the country’s first pension funds were up and running.
The long evolutionary road to European integration was also firmly on the agenda.
And if any European country has been boosted by EU membership, it is Portugal. The country’s transport and building infrastructure has been revolutionised by support from the EU, and the help has been mirrored by the Herculean efforts of the country to get itself on track economically for the advent of the single currency.
As a result - there is rarely hesitation amongst the Portuguese when asked if they also feel ‘European’, and Lisbon was proud to host the world’s ‘Expo’ cultural extravaganza this year.
However, Portugal’s love affair with Europe is by no means fully consummated yet, and although the rose being proferred to the country by EMU looks romantic, no-one in the Portuguese pensions and investment management arena is foppish enough to believe that such a flower hides no potential thorns.
In 1986, pension funding in Portugal received the legislative green light from the government, enjoying a tax break of 200% solely for employer contributions as a springboard for their development .
Legal requirements stipulated these plans could only be run by approved management bodies (Sociedade Ges-tora de Fundos de Pensões), and in-surance companies, which would control the asset investment andre-port to a government institution (In-stituto de Seguros de Portugal - ISP) on actuarial and investment return issues.
Investment management and custody could then be outsourced by the gestoras, although traditionally these services have remained within each separate banking group for financial and reporting reasons.
New legislation being discussed at present though is seeking to make the outsourcing process easier, and with the euro market imminent, such liberalisation could gain enormous significance.
From a zero start point, there are now around 250 approved schemes with over $12bn in assets under management, although the growth in the number of funds has been dampened in recent years following the reduction of tax deductible contributions to 100%.
Pension funds themselves now make up around 90% of total Portuguese pension plan arrangements, accounting for the majority of the country’s largest companies and government social bodies.
The remainder are financed either through insurance contracts or a traditional book reserve arrangement, and although they outnumber pension funds in number they are dwarfed in asset terms.
However, Portugal does have a number of anomalies within its social security/pensions system to explain away the distortion of the pensions industry by this concentration of larger funds.
For historical reasons the Portuguese civil service and banking sector have always funded the entire pensions rights of their workers, whereas private companies will normally look to top up the existing 60%-70% of final salary social security pension with a further 10-20% top-up.
Consequently, they are permitted to pay a tax-free contribution of around 25-30% of employee salary into their funds, against 15-20% in normal schemes.
As a result, the top 10 Portuguese pension funds represent around 70% of the total pension fund assets, with funds here including Portugal Telecom (the amalgamation of Marconi Portugal, Telecom Lisboa e Porto and Telecom Portugal), the Portuguese post office and Gestnave, the recently set up scheme of the Portuguese shipping industry.
The gestoras are virtually 100% owned by the banking sector, with the exception of Previsao, a gestora created by the companies specifically to manage the assets of Portugal Telecom and the post office.
There is however no legal barrier to the setting up of an independent gestora, but the banking embrace of the market is strong, as Bernie Thom-as, actuarial consultant at the Lisbon base of Watson Wyatt, explains: The sector is already well served and pretty satisfied with the service. There is also legislation de-manding a local presence and appropriate management provision, as well as a share capital of over Es200m (Ecu1m), which requires a serious commitment from anyone entering what is already a well developed market.”
Principally, the Portuguese pension fund arena can be split into three tiers, the banking sector, the state/civil service and large domestic company (many previously state-owned) domain and the multinationals.
And the pace of euro development in investment depends strongly on the characteristics of each branch.
For the multinationals such as Shell, BP and IBM with a large Portuguese presence, the shift to a predominance in euro assets is expected to be quick and decisive, following the Europe-wide trend.
John Grant at consultants William Mercer’s Lisbon branch, says: “All over Europe we are seeing multinationals consolidate their centralised European investment approaches and use preferred investment provider lists. And we are certainly seeing the multinationals’ funds in Portugal moving euro bound, much more quickly than the domestic company schemes.”
Luisa Evaristo, chief actuary at the Vanguarda Gestora, part of the BCP/Atlantico banking group which has its assets managed by AF investments within the same group, adds: “We manage the administration for several multinationals and they are all shifting to a much greater euro exposure and increasing their presence in any local decisions, which means stiffer competition for investment mandates. The reality is that the gloves are completely off in the battle for the multinational business and we have to box like any European player, if not a little smarter.”
However, Fernando Coelho, managing director at ESAF, the investment management arm of Banco Espirito Santo, partnered with French group Credit Agricole Indosuez and managing mandates for BP, Unisys and Rank Xerox, recognises the trend but senses a less dramatic asset drain: “The movement by multinationals may be towards the preferred pro-viders but with some companies operating on a strict risk profile for their asset allocation, it could be difficult to harmonise such a structure and the business may stay.”
In the domain of the big state/ domestic companies, the consensus in Portugal is that they will still retain a paternal instinct for domestic investment, particularly in light of the strong performance of the Portuguese stock market in recent years.
Undoubtedly, the market’s listing on the MSCI index in December 1997 has helped boost its profile - and the expectations are that there is still enough wind in its sails to offer healthy returns for the coming years.
Thomas at Watson Wyatt, says: “We think there could be a window of opportunity here of about 3-5 years and coupling this to national sentiment seems to indicate a more gradual euro shift within these companies to euro investment. However, should the Portuguese market begin to un-derperform, then I think domestic pride will be quickly dropped.”
Carlos Fernandes, director of ad-ministration at Previsão, the telecom and postal gestora which invests on a strict stock picking methodology, confirms this slower, progressive euro strategy: “We will not be immediately waving goodbye to Portuguese in-vestment because we see good pros-pects in the domestic shares and bonds that we presently hold. But undoubtedly, over time, we will shift tactically into euroland, although we are very conscious of exercising caution, because it is essential we develop the expertise and the right ‘machine’ through which we can externally manage our equity portfolios and ensure necessary safety controls.”
Approximate asset allocation for the funds within Previsão stands at between 20-30% in shares, with around 5% of this amount overseas, managed through Deutsche Morgan Grenfell - mostly in Europe, but exclusively in OECD countries.
Fernandes believes over time this level will start to approach the present 50% maximum imposed by the government.
On the bonds side, Previsao holds around 30% Portuguese state papers and 20% in foreign bonds with around 3% currently in Europe.
Here, João Gaiolas, director of investments at Previsão, says the euro shift will be much slower: “It will be very much a question of eurobond comparison to the Portuguese bonds we already have, and with the coupon which is available on the domestic papers, the differences will not be marked.” He adds that the Portuguese government though is diminishing its debts and Previsão has already bought government debt priced in deutschmarks.
One of Portugal’s largest domestic company funds, the country’s electric providers Electricidade de Portugal (EDP) is presently carrying out a major review of its investment structure, prompted in part by the euro.
EDP is one of the sole funds to operate a more developed investment mandate regime for its asset management, outsourcing its Es160bn to a total of seven separate gestoras.
And the accompanying system by which it pays out its pensions liabilities is equally developed, as finance director Magda Vakil explains: “At present we outsource on an arbitrary basis assets to seven managers - Vanguarda, Praemium, Esaf, M Reforma, Futuro, Fungest and Banco Portuguese de Investimentõ (BPI).
“Our pensions payments are then made on a monthly performance basis from these funds.”
She adds: “However, we are highly aware that consolidation within the Portuguese banking sector has rendered the original diversity concept of the system obsolete; with Vanguarda and Praemium both owned by BCP/ Atlantico, and BPI and Fungest set to mergesoon. These factors, coupled with the transformation of the European investment scene, linked to the euro, have prompted us to examine the whole essence of the structure we have.”
Vakil adds that in conjunction with the gestoras, EDP is seeking a breakdown of its investment portfolios to gauge the risk levels and ensure any euro shift can be handled with care. The company hopes to have its re-structuring in place within the first quarter of next year.
Within the Portuguese banking pension fund sector, analysts believe the search is already on to obtain the best investment performance by any means necessary. National sentiment is not expected to play any part in future tactical decisions.
Mercer’s Grant concurs: “If Portuguese companies are listed in Frankfurt or on any future centralised european stock exchange, then they will just go there and buy.”
And the shift to increased equities, expected to start pushing the 50% mark in a short period of time, will undoubtedly happen quickly in the banks’ pension funds - although Portuguese investors have shown signs of pre-euro jitters during the market downturn this year.
Portuguese bonds may still offer a safe coupon harbour, but as Grant adds: “Bonds here are now giving 4.5% yields. But this is nothing compared to the 10-15% received a few years ago, and nowhere near the returns on equities of course, so there is great impetus to move to euro shares.”
Nevertheless,Nuno Botelho, fund administrator at M Fundos, gestora of the Banco Mello group, which at June 1997 had a total of 28% in equities with 6% outside the domestic market, believes the euro-shift will be decisive but not as quick as presumed in coming.
“We expect to have around 25% of our equities in euroland ex-Portugal by the end of 1999, but in the first wave we don’t think Portuguese managers will make any drastic moves be-cause of the lack of expertise and knowledge of European equity markets.”
Botelho does believe the bond shift could be more dramatic than ex-pected though: “The bonds we have in Portugal are extremely illiquid compared to their European counterparts, so euroland will almost certainly be the land of opportunity when it comes to buying liquid and well rated paper.”
Fernando Coelho at ESAF, explains that they established a euro investment strategy as early as the end of 1997 to diversify their $1.1bn ($7bn total assets) in pension fund assets under management, using administrative and Sicav bases in Luxembourg and Dublin as a platform.
“By the end of this year we will have around 80% of our bonds outside Portugal, predominately in eurobonds, reflecting the liquidity and diversity on offer.
“And for equities, our tactical shift is greatly developing as we seek to invest the remainder of the portfolios in an approximate 10% split between home and euro shares, but with the accent very much on a sectorial value/ growth comparison approach,” he says.
He adds that ESAF has put out a more aggressive fund with 45% in euro equities to test the market, and believes the future will lie in this direction.
And suggestions are that Portuguese asset managers could start increasingly looking towards emerging market investment, such as in Poland, Hungary, Mozambique or Angola, using their experience of the domain, in search of higher returns.
On the insurance side of the pension plan market, euro investment preparation is equally feverish.
Francisco Campilho, gestora fund manager at Victoria Seguros, an in-surance company owned by German insurers Ergo, and managing in excess of Es12bn for 400 companies in insurance contract pension plans, says a gradual equity shift to around 10% within the domestic market has taken place over the last three years, and this is set to roll headlong into euro next year. “We will certainly be taking full advantage of investment in more liquid and efficient markets and raising our equity exposure to around 20% on a pan-European basis. And the likelihood is that this money will not be managed from Portugal, but from Germany, because it makes more sense to be using a specialist European asset management team,” he explains.
If any part of the Portuguese investment spectrum captures the fervour of a young market player sizing up the big euro card game, then it is the consultants and the flow of advisory business coming their way.
Principally the domain of multinational operators William Mercer and Watson Wyatt, operating through Lisbon bases since the fledgling Portuguese investment days, the market has seen slightly increased involvement from Towers Perrin through its Spanish Madrid offices and Callan Bacon & Woodrow through London, all pursuing the business boom.
“Consultants in Portugal are taking on a much greater role in designing and setting up pension plans and funds for companies which now know these must have a global investment accent. The fact we have been here from early on means the market is fairly well wrapped up by the main two Lisbon-based players. And with the increased outsourcing of fund management we see no end to the business coming our way,” says Watson Wyatt’s Thomas .
On the other hand, the liberalisation of the Portuguese investment market is causing concern over the possible influx of foreign managers to Portugal, particularly amongst the banking sector of Iberian neighbours, Spain.
One important counterpoint though is the proliferation of European alliances Portuguese banks have already procured. BPI is in league with UBS in Switzerland and BCP/ Atlantico is linked to UK group Friends Provident, Achmea in Holland and Wasa/Gothar in Germany under the Eureko umbrella management group. Banco Mello is also active in joint research with other European operators.
Significant foreign players already selling Ucits funds in Portugal include Lazard and Morgan Grenfell, with Barclays possessing a strong local presence and niche role in the country’s mutual funds market.
But resistance to incoming foreign players in the institutional field is likely to be strong. Portuguese investment authorities, worried about relinquishing some of their control on the market, will almost certainly hang on to their baby, despite EU regulations to the contrary which will inevitably weaken such resolve over time.
“Foreign managers looking to Portugal must have a base here, and if they do will enjoy the same rights as domestic gestoras, provided they meet our reporting criteria.
“But the trend at the moment seems to be for alliances with domestic managers because of the obvious cost factors and the relatively small size of the Portuguese pensions market,” says Maria Vicente of the ISP.
Overall the proof of the quality of the euro rose held before the Portuguese pensions and investment market, and the fate of the healthy relationship the country has enjoyed with EU, will be very much a sniff it and see affair.
To date, the odour seems to be generating a varied bunch of pre-euro reactions - and if anything the current European currency revolution could prove to be much more tempestuous than the country’s previous social insurrection ever was.”