EUROPE - VKG, the 18,000-member pension fund for doctors, dentists and pharmacists, decided in April to change its strategic asset allocation away from equities, in a move to protect itself from declining equity markets.
From an asset allocation of 55% to equities it has moved to a 45% allocation. This was a big step for a fund which normally sets its strategy for a seven year period.
“Forty-five per cent to equities is still a respectable allocation,” said Carl Haeck, finance manager for VKG.
“I didn’t want to go below 45% because if we go under, that would imply the risk that if the market recovers we would lose out.”
The VKG pension scheme was slightly underfunded in September, but Haeck is relying on improvement in markets to make this good in the end of year figures. VKG, unlike a corporate scheme, does not have an employer behind it to step in if there is a shortfall, though it does have a reinsurance contract for just such a situation.
“I think for the first time our reinsurance will have to step in,” said Haeck.
VKG’s asset allocation now stands at 45% equity, 45% fixed income and 10% real estate.
The fund’s allocation to fixed income has in the past included a 12% allocation to high yield, but this is gradually being wound down.
“We are liquidating that position and investing fully in investment grade,” said Haeck.
“I thought high yield is too correlated with equity markets and we decided to have the least possible correlation between them to reduce volatility.” By year end VKG will have completely evacuated high yield.
As the fund is structured as a Sicav, it is forbidden by the rules of a Sicav to invest in non-stock market listed equities, which rules out investments in hedge funds or private equity.
The fund is nonetheless looking into these asset classes and if a decision is made to go ahead this will be done through creating a separate portfolio.
Next year VKG is planning to add an SRI overlay to its portfolio, without having a specific SRI compartment.
“We will give our manager certain instructions on limitations to make as little possible impact on our returns,” said Haeck, who is yet to be convinced of an accurate definition of SRI.
“Every company has its own definition,” he said.
One notable success in its investment strategy has been currency overlay. An annual return on the fund of -13% in September would have been -15% without the overlay. “It has been a problem over the past few years,” said Haeck.
“Currency overlay has never created added value and a lot of trustees were becoming very impatient. Now this year the questions are resolved.”
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