VBV Vorsorgekasse, the severance payment fund of Austrian VBV Group, has shifted to a defensive investment strategy, shelving risky assets to navigate difficult investment markets.
The severance payment fund is taking a more cautious approach due to the currently difficult and challenging investment market environment, implementing measures to reduce risks, Michaela Attermeyer, member of the management board, told IPE.
VBV has therefore moved away from risky assets, especially credit and equity, which were gradually reduced, strongly diversifying foreign currency risks, Attermeyer added.
It also “significantly and temporarily” reduced interest rate risk, and built up a higher cash ratio, she added.
The scheme recorded a negative return in the first half of the year of -5.53%, it said, adding that the changes made to its investment strategy contained the losses in the second quarter.
Bonds heavily contributed to the fund’s negative performance in the second quarter, followed by equities, while a positive contribution came again from the Held to Maturity and loan portfolios, real estate and infrastructure, VBV said.
The pension fund has recorded an annual return of 2.44% since 2004.
The negative development in capital markets seen in the first quarter of this year continued in the second quarter, with losses recorded on equities and bonds, both on riskier bonds from borrowers with poor credit ratings, and bonds from top-quality countries, the pension fund said in a note commenting on the challenges it has been facing.
Euro zone equities lost 19.6%, measured against the EuroStoxx50 in the first half of the year, and at the same time what is considered safe Austrian government bonds also fell by 14.3%, it added.
The main cause of market volatility was a sharp rise in inflation, which accelerated after Russia invaded Ukraine, and the resulting rise in gas and electricity prices, forcing the central banks to act quicker than they had anticipated and communicated a few months ago, the pension fund noted.
Instead of making gradual interest rate hikes of a quarter of a percentage point, as has been the norm in recent decades, interest rates have repeatedly been doubled or tripled, it added.
The yields on bonds in the euro zone rose significantly in the first half of the year, leading to a painful drop in prices, even for those with the best credit ratings.
At the same time, riskier bonds and equities were hit by growing concerns about the economy, as central banks communicated more or less openly that they would also accept the risk of a recession to fight inflation, it added.