BELGIUM - Belgian pensions funds have kept their nerve amid falling equity markets and seem to be sticking to their allocations.
Belgium has a more aggressive approach to equity investing compared to some of its European neighbours with an average 50% of portfolios devoted to the asset class.
“I haven’t seen a move from equities to bonds in a movement of panic to cover liabilities,” said Benoit Fally at State Street Global Advisors, Brussels.
Instead, funds are adopting a ‘moving benchmark’: when equities fall, they do not buy new equities to keep to the strategic asset allocation but rebalance the benchmark in line with market movements. For example, if equities are at 50% in the benchmark, and markets decline to 45%, this becomes the new benchmark. Any further rebalance to 50% will be decided by the asset manager.
Sven Schroven, consulting actuary at Watson Wyatt, pointed to another factor behind the decision to stick with equities: “Some pension funds seem to be reluctant to decrease their proportion of equities because they are afraid of locking in the losses they have recently undergone on the stock markets.”
In bonds, there has been a move away from government bonds to corporates. Watson Wyatt endorses this strategy. Schroven said: “Because the government bond market is getting thinner, we would expect more investment in corporate bonds in the long term.
“Also, credit spreads have risen sharply and pension funds are now considering increasing the proportion of credit in their portfolios. We do not believe that the credit spreads correctly represent bankruptcy risk.
“Hence, investment performance may be improved by investing in a well diversified portfolio of good quality corporate bonds.”
Schroven also advocates active management for corporate bonds in contrast to government bonds: Dedicated active managers can deliver added value to corporate bond portfolios by in depth analysis of the issuers. In government bonds, hardly any value can be added by active management.
Balanced mandates are popular among Belgian funds, particularly for smaller schemes.
Most larger schemes adopt a core satellite approach but in current markets managers are trying to squeeze out every drop of extra return, which, according to SSgA’s Fally, has increased interest in enhanced strategies for passive elements of the portfolio.
“Enhanced is a way of investing whereby you take very little risk compared to the benchmark. By taking 1.5% of risk defined by the tracking error, the idea is to add up to 1% of extra returns.
“You construct a portfolio with the same characteristics as the benchmark in terms of beta style, but you take very little diversified bets, but lots of them and try to add value.”
Performance of Belgian pension funds over 2001 is, not surprisingly, down compared with 2000. Latest figures from the Belgian Association of Pension Funds report an average return of -5.12% for 2001, compared with -0.07% for the previous year. But so far a couple of years of negative returns have not had disastrous consequences for funding levels.
Belgian pension funds seem for the most part to have escaped the levels of underfunding which are plaguing Dutch schemes. The regulatory authority OCA reported in September a funding ratio of 139% for 2001.
At the same time it made a projection of a funding level for the beginning of 2002 to the end of August - based on an estimate of equity allocations losing 20% of their value, bonds increasing by 5% and the rest of the assets remaining constant. That produced a slightly lower estimated funding level of 131%. This comfortable state of affairs can be attributed to the fact that most Belgian funds declined to take contribution holidays during the bullish
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