“Equities and bonds were the main contributors to performance, but infrastructure and real estate investments also made positive contributions,” Stendevad said.Hedging activities, while broadly covering the DKK23.3bn increase in ATP’s pension liabilities, made a net loss of DKK229m — roughly the same as the loss incurred in the first quarter of 2013.Stendevad said falling interest rates in the first quarter 2014 showed how difficult it was to predict their movement.“Therefore, ATP’s hedging strategy is designed to ensure members’ guaranteed pensions are protected, whether interest rates go up or down,” he said.Four of ATP’s five risk classes produced a profit in the reporting period, but the inflation risk class ended with a DKK1.1bn loss.Within inflation, the biggest positive returns came from infrastructure and property, but the portfolio of hedging strategies was the main detractor, the pension fund said.This portfolio made a DKK1.9bn loss partly because of falling yields on long-dated European bonds and partly because of the decreasing volatility of those yields in the period, it said.Equities produced a DKK4bn return, driven mainly by the portfolio of listed equities.Domestic listed equities returned DKK1.8bn, while listed foreign equities returned DKK500m.The main reason for this positive return was ATP’s strategy of setting its exposure to listed foreign equities according to market prices, it said, increasing exposure when prices are low and reducing it when high.By contrast, over the first quarter as a whole, US and European equity benchmarks logged only small gains, it said. ATP made an investment return of 5.1% in the first quarter of this year, significantly higher than the result achieved in the same period a year ago, and said listed Danish equities, international private equity and bonds had been the main drivers.The Danish statutory labour-market pension fund reported that its total assets had grown to DKK618bn (€82.8bn) by the end of March, up from DKK592bn at the end of 2013.Carsten Stendevad, ATP’s chief executive, said: “ATP is off to a good start in 2014.”In the first quarter, investment activities made a profit of DKK4.05bn after tax on pension savings returns, up from DKK2.86bn in the first quarter of 2013.
Investment consultancy Kirstein has opened its first office outside Denmark, branching out into the US in a bid to improve links with US asset managers as well as its grasp of the US market for the benefit of clients.Martin Nielsen, Kirstein’s former head of search and selection, is leading the new office in the role of president of Kirstein US.Nielsen told IPE: “The main purpose is to serve our clients better through a closer dialogue with American asset managers and to achieve a greater understanding of the US market.”He said the large number of highly qualified US managers covering a range of different asset types represented a strong proposition to Kirstein’s clients. Because of this, he said, it had been very important that the firm strengthen its local presence there.“Furthermore, being directly positioned in one of the world’s key financial centres will also contribute to our ability to advise our clients on trends in the US market,” he added.Kirstein first started looking into the possibility of opening a US office at the beginning of this year, after seeing solid growth in all three of its business area – search and selection, investment and pensions and financial market research – in 2014.Nielsen said pension fund clients in Denmark would benefit from the firm’s having a new foothold in the US by getting “unique” access to the US market and asset managers. “Clients will get an even stronger monitoring of the US asset managers, identification of investment tendencies amongst the American investors, along with insights and investment opportunities previously hampered by the physical distance,” he said.This is the first time Kirstein has opened an office abroad, but as yet, it has no plans to open any more outside Denmark.In its 2014 results released in May, Kirstein said total revenue increased by around 65% over the last three years.It attributed this growth to its consultancy work with a small number of institutional investors, which had combined assets of about €2.5bn, and the fact its financial market research department – which analyses investor behaviour in Continental Europe for big Danish and international asset managers – had continued to expand.
Judge Gross from the Delaware Bankruptcy Court said he fully understood the implications of the decision made in May, while Justice Newbould from the Supreme Court of Ontario accused the bond holders of providing misleading figures.“I see no injustice in the result,” Newbould said.“I need not repeat what is contained in the reasons for judgment released on 12 May 2015. Nothing argued on this motion leads me to consider I erred in any way in those reasons.”The original case has been ongoing since the Canadian company’s insolvency in 2009, triggering one of the world’s largest insolvencies.Facing a £2.1bn (€2.9bn) hole in the UK pension scheme, the trustees, alongside the regulator and PPF, began legal proceedings against the remaining estate to seek funding.However, proceedings were then challenged by the company over the right of the UK regulator to issue demands across borders.Other creditors also challenged the ruling, suggesting they had more right to the remaining $7.3bn of Nortel assets, with May’s decision providing equal footing.Angela Dimsdale Gill, a partner at law firm Hogan Lovells, which represented the trustees, said the firm saw no basis to change the judgments in the appeal.“The Judges have demonstrated they are robust in their view that a pro rata distribution of the remaining Nortel assets is the fairest and most just result,” she said. “We hope the matter can now be swiftly concluded and that all creditors can access what is rightfully theirs.” Two courts have thrown out an appeal by Nortel Networks bond holders against a decision to provide the UK pension fund with equal claim on assets, after the US creditors were accused of misleading the case.In May, two judges sitting simultaneously in US and Canadian courts ruled that the trustees of the Nortel Networks UK pension scheme were entitled to an equal share of the remaining $7bn (€6.3bn) of assets left over from one of the world’s largest insolvencies.Nortel’s other creditors, mainly US bond holders, challenged the decision, which they said was unequal between their claim and that of UK trustees, backed by The Pensions Regulator (TPR) and Pension Protection Fund (PPF).Again, judges in the US and Canada dismissed bond holders’ claims that the initial decision would lead to unintended consequences.
The first is the changes in the headline spot prices of the commodities. The second is the return on the collateral used to back up investment in futures by an institutional investor that typically would not be leveraging its investment, so a $100m (€94m) investment via futures contracts would generate a Treasury bill rate of interest on the capital. The third is the so-called “roll yield” obtained through switching from a maturing futures contract to one of longer maturity.In the case of energy futures, the longer-dated contracts have often stood at a lower price than maturing contracts, giving rise to a ‘backwardation’ in prices, in contrast to the situation seen in financial futures markets and precious metals such as gold, where the longer-dated contracts are in ‘contango’ – i.e. priced above maturing contracts. The size of the contango or backwardation can change rapidly reflecting supply and demand but also interest rates, storage and borrowing costs.What this has meant is that a major source of returns for investors in energy contracts has been obtained through rolling the futures contracts. In 2006, when oil went from $35 to $50 a barrel, the S&P GSCI index had a negative return of 14% because the energy markets were in contango, whilst in 2007, with the markets in backwardation, the return was 32% when oil prices shifted from $50 to $80 a barrel. When the oil futures markets are in contango, as has been the case recently, investors in ETFs that are rolling futures will be making losses every time.Institutional investors that have made major investments into commodities, particularly energy, either exclusively or through tracking indices such as the S&P GSCI or Dow Jones, may need to think deeply about what role commodities play in their portfolios. Perhaps investors also need to be aware that, in every other asset class, capitalism works for them. Companies exist to make profits, so the value of ownership goes up, while bonds pay interest and capital back.Whether that is true for commodities is unclear. Gold may provide diversification, but its price can just as easily go down 50% as go up, and there is no reason why the price of a barrel of oil has to be worth more in 50 years’ time than it costs today. It can be useful to include commodities in a portfolio primarily for their correlation characteristics. A lot of assets don’t like inflation – bonds, for example, and even equities in the short term. Commodities in that sense are often seen as inflation hedges. But, on a pure return and volatility basis, their weight would be zero.The danger for institutional investors is that, whilst commodities can act as a powerful diversifier for institutions that need to reduce volatility, even by small amounts, the prospects for extraordinary gains are more suspect. Moreover, the timing, even for diversification benefits, may be unattractive if the lack of backwardation driven by the influx of investment by the institutions themselves means the opportunity for positive returns is greatly diminished.It is interesting to note that even proponents of risk parity acknowledge that commodities should not have the same risk weighting as equities and bonds. Long-term institutional investors should look to assets that can generate economic returns rather than serve as a volatile store of value. Joseph Mariathasan is a contributing editor at IPE Investors should look to assets that generate returns, not merely store value, argues Joseph Mariathasan“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” is an oft-quoted comment by Sheikh Ahmed Zaki Yamani, the former Saudi oil minister. And whilst there is plenty of talk about alternatives to fossil fuels, and electric cars are coming into use, it is still difficult to see a complete transition from the petrol engine for possibly decades.But oil prices have collapsed since mid-2014. Perhaps that is why almost one-third of the most active oil futures contract, West Texas Intermediate, was held by ETFs at one stage. They were hoping to be in at the bottom when (and if) the oil price rebounds. Inflows into commodity baskets rose to a 16-month high in the first half of November, according to ETF Securities.But investors face a major problem with commodity investment often glossed over by intermediaries. Investment in via the futures markets – either directly or indirectly through use of indices based on futures contracts – generate returns through three different sources.
PFA has created a new department in which Bram Jensen will work, having broadened its public affairs department into the new regulatory affairs department.Back in October, PFA’s chief executive Allan Polack indicated the company was in the process of deciding how its communications and public affairs activities should be organised, following the sudden departure of its director for group communication and public affairs, Morten Jeppesen.Bram Jensen told IPE: “The great tsunami of regulation aimed at the banking sector following the financial crisis has now hit the pension providers.”The Danish FSA (Finanstilsynet) now has an increasing focus on pension providers, she said, adding that new rules now being put in place are aimed at putting the sector into a tighter regulatory framework.“The issue is not only that politicians are currently legislating to bring about these tighter regulatory conditions for the pensions sector but also that the FSA itself is creating more restrictive rules within the mandate it has already been given by Parliament,” she said.Bram Jensen said PFA was one of the first to hire regulatory lobbyists in the Danish pensions sector.“In the banking sector, it is quite normal to have public affairs people who have this role, but here in the pensions sector it is not very widespread,” she said.The increasingly onerous financial regulation affecting pension funds and providers can lead to big costs for the businesses, Bram Jensen said.“Since PFA is the largest pension provider in Denmark, we are in quite a unique position to be able to influence the decision makers who are putting these rules in place,” she said. PFA Pension, the largest commercial pensions provider in Denmark, has hired former government special adviser, or “spin doctor”, Janne Bram Jensen in the newly created role of regulatory affairs director, in a bid to influence regulators increasingly turning their sights towards the pensions sector.Bram Jensen started her new job at PFA Pension in January, having come to the DKK552bn (€73.9bn) mutually owned pensions firm from her role as deputy head of the Mayor of Copenhagen’s secretariat.Before that, she was a special adviser to the Social-Democrat minister for the environment Kirsten Brosbøl.According to PFA, her new role is to professionalise the work with regulatory affairs in PFA, build relationships with politicians, officials and other decision makers in Denmark and in the EU, and contribute to the public debate around change in the legal and regulatory framework for the financial sector.
Institutional investors are increasingly using factor-based strategies, with their motivation shifting from risk management to improving performance, according to a survey sponsored by BlackRock.The survey was of 200 executives from institutional investment organisations in 20 countries across the Americas, the EMEA and Asia Pacific, with more than $5.5trn (€4.8trn) in assets under management.According to BlackRock, the survey found that factor use was widespread and on the rise.More than 85% of respondents employ factors in some part of the investment process, and nearly 66% of the organisations surveyed said they had increased their usage of factors over the past three years. Sixty per cent of respondents said they planned to increase their use of factors over the next three years.The desire to improve returns was the most important motivation for increasing factor use, said BlackRock.For new factor users, the top motivation is to better understand risk and return.The same percentage said they achieved this goal, while 59% said they increased diversification, and similar proportions said they lowered risk (56%) and increased returns (55%).More than half (53%) of the institutions surveyed use investment strategies targeting one or more factors, according to BlackRock, with value being the most commonly targeted style factor and inflation the most commonly used macro factor.Equity factor strategies – smart beta, for example – are most widespread, used by 68% of investors, but 57% of respondents investing in factors also use more advanced long/short multi-asset strategies.More than two-thirds of respondents seeking to increase factor use over the next three years will be working on their risk-management systems, while more than half expect to seek advice from asset managers, and 37% expect to hire additional staff.Half of those increasing said they would make an initial allocation to an investment strategy to monitor performance, according to BlackRock.Andy Tunningley, head of strategic clients at BlackRock’s UK institutional business, said the “unexpected correlations” of asset performance during the financial crisis spurred investors to better understand underlying risks, and that this had piqued interest in factor strategies.“Following an initial focus on risk management, investors increasingly believe factor strategies can drive enhanced performance,” he said.The results of BlackRock’s survey, conducted by the Economist Intelligence Unit, come after ERI Scientific Beta, a provider of smart beta indices, late last month published research, “Smart beta is not monkey business”, rejecting claims the results of smart beta strategies could be generated by any random selection of stocks.ERI Scientific Beta, part of EDHEC-Risk Institute, said it ran tests that “directly invalidate” these claims and that “many smart beta strategies display exposure to factors other than value or small cap, as well as pronounced differences in factor exposures across different strategies”.Factor investing is based on the idea that the risks and returns of all investments can be linked back to a common set of underlying factors.These can be what are referred to as style factors, such as size, momentum, quality and value – or macro-economic factors, such as growth, inflation and interest rates. Smart beta is an alternative term and captures the idea that investment strategies based on factors such as these, rather than market capitalisation, can add value.See April’s IPE magazine for a special report on factor investing
One of the major points where MPs disagreed with members of the Ständerat was on how to account for the 12% drop in future second-pillar pensions resulting from lowering the conversion rate.While the Ständerat wants to increase first-pillar pensions from the state AHV/AVS system, the conservative majority in the larger chamber voted against this.Conservative politicians referred to the public’s recent rejection of a state pension hike in a referendum on the AHV-plus on Sunday.Instead, conservatives want second-pillar pension cuts to be offset solely within workplace pensions.One change would be to slash the so-called Koordinationsabzug, used to calculate contributions into the second pillar by cross-referencing them with first-pillar pensions.If it is cut, lower-income earners will have to pay into the second pillar, increasing pension spending for small and medium-sized enterprises (SMEs) but also giving more people the opportunity to save.The Nationalrat’s social committee added a new proposal to “de-politicise” technical parameters like the conversion rate or the minimum interest rate.It wants to introduce automatic calculation algorithms rather than have these rates set by commissions and politicians.The Nationalrat also surprised many with a new proposal to help finance the first-pillar AHV.It wants to introduce an automatic mechanism that would increase the pension age to 67 in lock-step with VAT, should the AHV lack the necessary funds.In contrast to the Ständerat and the Swiss government (the Bundesrat), which had drafted the first reform proposal more than two years ago, the Nationalrat only wants to raise VAT by 60 basis points to help fund the AHV.The Ständerat proposed an increase of 100bps, the government, 150bps.The Nationalrat agreed with the Ständerat to raise the statutory retirement age for women to that of men (65), and retirement will be made more flexible between the ages of 62 and 70.The new draft will now be sent back to the Ständerat before it returns to the Nationalrat for the lower chamber’s December session.For more on Swiss pension reform, see the November issue of IPE magazine The minimum conversion rate (Umwandlungssatz) in Switzerland’s mandatory second-pillar pension system is set to be cut from 6.8% to 6% over the next years after the move was approved in the lower house of Parliament on Wednesday.This part of the draft for the Altersvorsorge 2020 (AV2020) pension reform package – presented to the Nationalrat, the larger house of Parliament, by the Ständerat, the upper chamber, a few months ago – enjoyed majority support among MPs.The debate on Wednesday was briefer than many analysts expected, but it brought some amendments to the draft, which the Ständerat must now discuss again.Interior minister Alain Berset, however, said the draft “still needs work”, while Switzerland’s unions have argued that the Nationalrat’s proposal would fail to win a majority, “as workers cannot accept it”.
But the UK has fallen out of the Top 10 nations in the world, having only joined the club in the 2014 study.It has now been replaced at tenth place by Chile, and fallen one place to eleventh.Meanwhile, Latvia, Estonia and the US complete the list of the 10 countries with the most sustainable public systems.The accompanying report observes that, since 2014, a substantial number of countries have improved the sustainability of their pension systems.Brigitte Miksa, head of international pensions at Allianz Asset Management, said: “Pension reforms initiated in many countries a decade ago – raised retirement ages, reduced benefits in line with expected increased life expectancies – are now starting to bear fruit.“Social behaviour has also changed, as people reacted to the incentives offered as a result of the reforms.”This has been particularly notable for the Baltic countries, with Estonia entering into the Top 10 and Lithuania moving up to 16.“The score of all three countries has been positively impacted by the fact they have continued to implement reforms to increase the effective retirement age and reduce the burden of the pension system on public finances,” the report said.France was among the fastest climbers – up by more than five places since 2014 – along with Chile, Japan, Malaysia and Mexico.“The improvement is due to an increase in the effective retirement age and a positive revision of the 2050 pension expenditures-to-GDP forecast,” said the report.But Ireland, Switzerland, Italy, Croatia and Russia experienced significant declines.Ireland has been hit by a deterioration in its demographic outlook following the UN population projection revision, which has contributed to a significant decline in the replacement rate, according to the report.Switzerland is experiencing a worsening demographic outlook, which has had a negative impact on its sustainability score.“Nevertheless,” the report said, “Switzerland continues to compare favourably to its peers thanks to a relatively low level of general government debt relative to GDP, a relatively high effective retirement age and a good coverage ratio.“Moreover, pension expenditures as a share of GDP are not expected to increase dramatically in the coming decades.”The report observed that Italy and Spain had both implemented recent reforms but that more needed to be done.“The effective retirement age remains relatively low in both countries, while pension expenditure as a percentage of GDP remains high, and the populations are expected to age quickly,” it said.“Encouragingly, recent reforms mean pension expenditure as a share of GDP is not expected to increase significantly over the coming decades.”However, Miksa provided a sombre caveat even for those countries that made progress with pension reforms.“Our study assesses the financial sustainability of public pension systems but does not examine the flipside – the adequacy of state pensions,” she said.“Reforms of the past decade have improved the sustainability of the pension systems at the price of reducing the level and the security of benefits.” Australia maintains its position as the country with the most sustainable public pensions system, according to the Allianz 2016 Pension Sustainability Index.As with the last study, published in 2014, the Nordics are the top European countries.Denmark is runner-up, followed by Sweden, the Netherlands and Norway.New Zealand again claims sixth place.
EIOPA’s model was different from the reality, in which pension funds’ ability to manage their liabilities was much better than the supervisor had concluded, according to the umbrella association.PensionsEurope disputed EIOPA’s conclusion that, on aggregate, defined benefit and hybrid schemes had insufficient assets to cover their liabilities. The association pointed to EIOPA’s finding that the aggregate funding ratio of IORPs in the sample amounted to 97%.This was not a serious European problem, and did not contain serious spill-over risks into the real economy, according to PensionsEurope. The 97% figure cited by PensionsEurope is the figure EIOPA gave for the “baseline scenario” in its testing. The conclusions the European Insurance and Supervisory Authority (EIOPA) has drawn from its stress tests of European pension funds are “too strong”, the region’s pension fund umbrella association has said.It said it was not surprised by the outcomes of the stress test, but then proceeded to challenge their meaningfulness.It said EIOPA had made very strong allegations about the health of IORPs based on its own theoretical model, when this “common balance sheet” had not been adopted by the EU or any member state and the rules actually used at a national level did not support EIOPA’s findings.“The differences in findings highlight how EIOPA’s model is not fit for purpose,” said Brussels-based PensionsEurope. Matti Leppälä, PensionsEuropeMatti Leppälä, secretary general of PensionsEurope, said a cash flow analysis would be much more useful than EIOPA’s methodology.“This means looking at how much money goes out, how much comes in, is there a problem, when and how can the IORP deal with it?” he said. “Market capitalisation of the sponsor company does not give any meaningful information about the possible pension problems. “EIOPA’s report itself doesn’t support the conclusion that over a quarter of IORPs might face challenges meeting their obligations, but regardless EIOPA aims to raise unnecessary concerns about the health of the sponsor companies. Even the actual results presented in the report don’t support the strong allegation published in EIOPA’s press release.”PensionsEurope aims to publish a position paper on the 2017 stress test in February or March. This would contain the association’s proposals on cash flow analysis.
ERI Scientific Beta has strongly criticised a November 2017 Mercer report on factor investing, calling it an “all-out attack against evidence-based investment”.The consultancy’s report was “representative of undocumented opinions” and therefore liable to misinform investors, according to the smart beta indices and analytics provider.In a paper setting out their criticism in detail, Frédéric Ducoulombier, corporate director of ERI Scientific Beta, and Noël Amenc, its CEO, said: “It turns out that Mercer’s investment beliefs align nicely with their bottom line but not so much with the bottom lines of end-investors.”According to ERI Scientific Beta, the consultant’s report had correctly underlined the potential for smart beta and factor strategies to add value, and the need for proper due diligence on these strategies. But, it said, Mercer then recommended discretionary solutions “by argument of authority or by peddling (debunked) clichés on systematic strategies”.In its report the consultant argued: “For a relatively small increase in fee level, active multi-factor approaches offer superior risk management and portfolio evolution over time.”“There is ultimately no empirical evidence supporting Mercer’s allegations against factor investing, hence they are just unfounded assertions.” Noël Amenc and Frédéric Ducoulombier, ERI Scientific BetaA spokesman for Mercer told IPE: “We stand by our research conclusions and respectfully disagree with many of the points being made by ERI Scientific Beta.”Ducoulombier and Amenc took issue with 13 sections of Mercer’s report, including the assertion that factor indices could be “dangerous” and were prone to crowding.The ERI duo argued that “assessing crowding risk requires research, not just anecdotes, and there is little reason to be concerned about crowding if factor returns reward the taking of systematic risk”.Mercer also stated in its report: “For investors facing few governance or fee constraints, we believe that truly unconstrained active strategies offer the potential to capture factor returns in an intelligent way, while also benefiting from market awareness and idiosyncratic alpha, potentially improving returns, controlling risk and enhancing diversification.”In response, Ducoulombier and Amenc said: “Everyone is entitled to their beliefs, but investors would benefit if such beliefs were solidly grounded in scientific research, i.e. evidence-based as opposed to faith-based.“Contrary to what is assumed here, it is perfectly possible to design market-aware dynamic factor strategies that remain fully systematic and highly diversified; these strategies even exist in the long/short space with some offering zero exposure to broad equity market risk.”The full ERI Scientific Beta paper can be found here and a summary version of Mercer’s report here.