SWITZERLAND - Exclusive: Geneva-based Fonds de Compensation de l'Assurance-Veillesse et Survivants (AVS), the state social security fund, has become the latest scheme to tap into the inflation-linked bond market.
AVS has just made an initial SFr1bn (e657m) commitment to an undisclosed Swiss investment manager for a passive brief benchmarked against the Barclays Global Inflation-linked Bond Index. The move marks AVS’s first foray into the asset class.
Dominique Salamin, head of the fund, said that the allocation is a way of generating alpha but also hedging against credit risk from other portfolios.
“[It] means that we are immunised to inflation risk and exposed to a real rate of return which adds to the diversification of the fund”, he said.
“The second reason is that we wanted to increase the asset allocation to high yield and emerging debt and by investing in inflation-linked bonds we have no credit risk at all.”
Inflation-linked securities guarantee a return that beats inflation if held to maturity.
Typically, chief drawbacks include deflation, a lack of liquidity and the fact that the inflation adjustment is taxable annually but not paid out until maturity.
AVS, which has Sfr19bn (e12.5bn) assets, recently appointed four non-Swiss managers to cover two high yield and emerging market debt portfolios. Salamin said that no additional details could be offered because contracts were being finalised.
Last year, PGGM, the e51bn pension fund for Dutch healthcare and social workers, committed US$200m (e170m) to a new active inflation-linked bond brief.
The fund hired Barclays Global Investors to construct the new portfolio which will be benchmarked against the Lehman Brothers Global Real Index and is designed to add between 50 to 100 basis points per year.
On separate note, AVS is looking increase its property allocation from 1.1% to 5%.
Salamin said that its is likely the additional 4% will be managed in-house on a passive basis.
AVS already has a Swiss quoted real estate portfolio with Rued Blas valued at some Sfr220m at the end of September 2002. This brief will remain unchanged.
The two new mandates, covering European and US real estate, will be benchmarked against the EPRA- and MSCI US equity index respectively.
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