VPK diversifies strategies and managers for outperformance
Established in 1990, the Vereinigte Pensionskasse AG (VPK) is the largest general pension fund in Austria. The running contributions increased to e106m in 2001.
In March 2001 the VPK commenced the formulation of a new equity holding concept. Two central themes dominated this formulation, namely strategy diversification and manager diversification. The fund decided to hire a consultant partner for the decision-making process.
For the VPK the objectives of the project were to improve the earnings through the increased quality of the manager on one hand, and to decrease the risk of the entire share allocation through the relatively low correlation between the various strategies, on the other.
The expectation for each strategy was for both a long term fixed ‘out performance’ as well as special growth in particular market phases. Special attention was paid to a style that would not only perform well in a bull market, but that would have an approximately balanced performance or at least significantly outperform a severely falling market.
In the end we were left with three styles: Quantitative – enhanced index tracking, fundamental traditional, where the manager looks in detail at the fundamental performance figures of the organisations whilst taking the benchmark into account, and fundamental bottom-up, where the orientation is firmly towards the fundamental performance figures of the organisations, with no, or a greatly reduced, benchmark orientation.
The transformation to the new concept was completed successfully in July 2001.
Having selected appropriate managers, the fund then ran an optimisation process under which each manager was handed either 20% or 10% of the allocation. For comparative purposes all managers received the same benchmark – the MSCI World Index on a euro basis.
The experience to date has proved the superiority of the concept in all market conditions. So far the benchmark on portfolio level has been outperformed every time with the catalyst of the outperformance proving to be a different manager in each market condition. Through the combination of the localised investment strategies, an optimum investment mix for a long-term investor is being formulated. Through an optimum combination of managers and investment strategies the following positive effects are being achieved: improvement of the earnings/risk ratio generally, enhanced protection in ‘bad market years’ through the benchmark independent strategy of the ‘bottom-up’ manager, and performance enhancing competition within each of the three strategies, through the comparison of two managers.
In March 2002 the VPK also implemented a multi-manager/multi-strategy system for the key segment of euro-denominated bonds. In this segment the fund identified two active strategies: ‘quantitative–technical’ and ‘fundamental’.
Again, in an effort to achieve objective appraisal opportunities, the managers appointed were given the same benchmark (JPM EMU) as well as the same restrictions, such as duration bandwidths, permitted allocation on corporates, max tracking error and credit worthiness ratings. The VPK believes that through this specialised strategy mix even an efficient market like the euro government bond market has room for outperformance in the long term vis-à-vis the benchmark.
To achieve a balancing effect in the bond portfolio the VPK invests in an ‘absolute return’ managed fund and in global investment-grade corporate bonds.
Additionally, real estate and multi-manager hedge funds are growing in importance in the eyes of the VPK. In both segments the fund is aiming for a wide regional and sectoral diversification.
To support the tactical asset allocation the VPK developed an ‘indicator system’ in 2001. The system is based on several fundamental as well as psychological/technical factors and produced on a weekly basis to assess the relative attractiveness of the stock market vis-à-vis the exchange- and bond markets. This indicator system serves as a useful input in the tactical asset allocation decision and on the part of the VPK, is publicly announced on an ongoing basis.