ateb 2011 greenwich speech v f2
DESCRIPTION
Keynote speech for the belgian Association of Corporate Treasurers. ......Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are quite dislocated from their policy targets. European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations.....TRANSCRIPT
Pension Plans: Challenges and Responses
Continental European Investment Management 2011
CONFIDENTIAL
29 September 20111
2 CONFIDENTIAL
Summary of Key Findings
▪ Continental European institutions reported rising asset levels on the back of the rebound in equities; however they stand well below 2007/8 levels and recent events in global markets and substantial falls in key risk assets will have been detractive to most portfolios.
▪ In the broad market, international equity allocations have risen on the back of positive markets and now almost match allocations to domestic equities, which have contracted. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. A minority of institutions anticipate making significant asset allocation changes. The weight of responses indicate reductions in European government bonds and increases in private equity.
▪ The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income. Both equity and fixed income external allocations are focused on European product except in the case of pension funds, where international equities is dominant.
▪ Defined benefit pension fund asset allocations are quite dislocated from their policy targets. The sovereign debt crisis has driven a tactical rotation out of passive European government bonds into active product and international bonds; Meantime, European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations.
▪ Large funds have expanded the number of external managers used, diversifying away manager-specific risk and hiring more specialist firms. In aggregate, however, both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low characterized by little product focus.
▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment.
▪ Investment consultant usage has fallen again.
Representative Quotes
•“Capital markets will not generate the fund return demanded
within reasonable risk limits.” –German Corporate Pension
Fund
•“We need 3.5% performance every year which is a challenge
as long as Swiss bonds return only 2%.” –Swiss Insurance
Company
•“Issuer risk [is driving us] away from high-risk Euro-Govies.”
–German Endowment/Foundation
•“The Euro debt crisis is currently our major concern.” –
Belgian Insurance Company
•“[We are] very worried about an interest rate increase.” –
Belgian Corporate Pension Fund
•“We want to get out of interest rate guarantees [/] I am
deeply worried about high interest rates.” Danish Corporate
Pension Fund
•There are major political issues to worry about, the U.S.
deficit, the Japan disaster, the Arab dictator states etc.” –
Swedish Corporate Pension Fund
3 CONFIDENTIAL
Key issues facing institutional investors
Source: Greenwich Associates 2011, CEIMF-11
▪ Achieving the target rate-of-return is cited
as the number one concern by many
institutional investors
▪ Other key issues include:
— Sovereign debt crisis
— Risk of inflation
— Interest rate increases
— U.S. deficit
— Japan disaster
— Arabian political turmoil
Representative Quotes
• “Increased regulation coming from the central bank [is] putting
pressure on smaller pension funds and making their life difficult to
impossible” –Dutch Corporate Pension Fund
• “[We are experiencing] undue and irresponsible big pressure
from the 2 regulators on pension funds.” – Dutch Corporate
Pension Fund
• “We have to become so transparent that we have to inform the
regulator beforehand what investments we intend to make. This
is not in the interest of our clients at all.” –Dutch Corporate
Pension Fund
• “The restricting regulations imposed on the pension funds created
by the state to contribute to the Swedish general pension system
limits the placement possibilities and thereby makes it difficult to
obtain a satisfactory rate of return.” – Swedish Corporate Pension
Fund
• “Solvency II regulations and at the same time, the bank regulation
Basel III, keeps me up at night.” –Danish Bank
• Basel III regulations and its consequences [are leading to] tighter
liquidity, forced equity increases and more difficult refinancing.” –
German Insurance Company
• “It is unclear at this time what the impact of Basel III will be on the
capital requirements of the bank which could affect substantially
our Depot A.” –German Bank
4 CONFIDENTIAL
Key issues facing institutional investors
Source: Greenwich Associates 2011, CEIMF-11
▪ Regulatory developments are causing
additional stresses across the region:
— Regulations impacting Dutch pension
funds are widely seen as overly
restrictive and not in member’s best
interests
— Solvency II implementation
— Basel III and liquidity requirements
Representative Quotes
• “ [We are becoming] more active and less passive because of the
PIIGS problems.” –Norwegian Endowment/Foundation
• “[We are] shifting the government bonds portfolio to low-risk-
government bonds.” –German Corporate Pension Fund
• “Shift from government bonds to inflation linked corporate
bonds.” –German Corporate Pension Fund
• “There is too much enthusiasm for emerging markets, so we are
liquidating Asia and moving into Global Emerging Markets
including Eastern Europe and Latin America.” –Dutch Insurance
Company
• “We are increasing our investments in Emerging Markets such as
BRIC, but nothing in Africa.” – Swedish Corporate Pension Fund
• “Alternatives are potentially interesting but there is still lack of
transparency and liquidity in some products.” –Swiss
Endowment/Foundation
• “We are short duration, and now contemplating doing a swap or
buying put options or even inflation linked bonds.” –Swiss
Corporate Pension Fund
5 CONFIDENTIAL
Asset allocation trends
Source: Greenwich Associates 2011, CEIMF-11
▪ A significant number of institutional
investors are contemplating more active
management of their assets in order to
selectively avoid exposure to perceived
risk areas.
▪ Investors are diversifying out of
government bonds.
▪ While positioning portfolios to benefit
from the shifting economic balance
between emerging and developed
markets, there is growing concern of a
bubble forming.
▪ Transparency remains a major hurdle to
investing in alternatives.
▪ Use of derivatives for risk management
purposes is growing.
6 CONFIDENTIAL
Institutional assets levels are recovering, but still fall well short of 2007
highs
C.E. Institutional Investors’ Total Institutional Assets 2001 – 2011, by Type of Institution (excluding Banks and Savings Banks)
€ 192 € 195 € 143 € 217€ 360 € 330 € 412 € 434
€ 309 € 334€ 467
€ 490 € 483€ 449
€ 493
€ 653 € 631
€ 750€ 491
€ 371 € 417
€ 549
€ 505
€ 658€ 763
€ 778
€ 100
€ 736
€ 575
€ 939 € 890
€ 1,161
€ 882
€ 1,258
€ 1,281
€ 1,489
€ 1,214
€ 1,484
€ 2,035€ 1,978
€ 2,454
€ 2,305
€ 1,699 € 1,655
€ 1,885
€ 0
€ 500
€ 1,000
€ 1,500
€ 2,000
€ 2,500
€ 3,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Eu
ros (
billio
ns)
Corporate Pension Public Pension Corporate Treasury Foundations Insurance
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined
contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Banks and Savings Banks not shown as
trend impacted by change in question methodology.
7 CONFIDENTIAL
While fixed income continues to dominate, international equity allocations
have grown on the back of positive markets and now almost match
European equity allocations which have contracted
C.E. Institutional Investors Asset Allocation 2011
10.7%
9.6%
60.6%
6.6%
3.3%
6.1%
5.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011
Pro
po
rtio
n o
f T
ota
l C
.E. A
sse
ts
European equities International equities Fixed income
Cash Real Estate Alternatives
Other
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets
together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
Fixed income is broadly stable,
growing by about 3% since 2009
International Equity allocations
have more than doubled since
2009
European Equity has reduced
by15% since 2009
Cash allocations are little changed
Real Estate has increased by 7%
Allocations to Alternatives have
reduced since 2009 from a low
base
8 CONFIDENTIAL
A minority of institutions anticipate making significant changes to their
overall asset allocation in the next 3 years; weight of responses indicate
reductions in European government bonds and increases in private equity
4
5
2
1
13
14
28
1
10
14
2
48
16
31
26
28
15
2 4
4
6
8
8
9
10
11
12
14
19
22
24
28
29
31
33
12
60 50 40 30 20 10 0 10 20 30 40 50 60
European Bonds – Passive
Other
International Equities – Passive
International Bonds – Passive
Infrastructure
European Equities – Passive
European Credit Bonds – Passive
Cash and Short-Term Investments
European Government Bonds – Passive
Hedge Funds
Commodities or Natural Resources
International Bonds – Active
Private Equity
European Government Bonds – Active
Real Estate
European Equities – Active
International Equities – Active
European Credit Bonds – Active
Number of C.E. Investors
Significantly Decrease Significantly Increase
C.E. Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Three year outlook.
Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
179
147
173
156
176
137
138
110
144
129
133
150
146
105
128
134
45
145
No Change
9 CONFIDENTIAL
Anticipated change levels in Belgium
0
5
1
3
5
4
3
0
1
0
0
5
1
3
0
0
1
0
1
3
5
3
6
5
1
1
0
0
0
0
1
1
2
0
0
0
10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10
European Bonds – Passive
Other
International Equities – Passive
International Bonds – Passive
Infrastructure
European Equities – Passive
European Credit Bonds – Passive
Cash and Short-Term Investments
European Government Bonds – Passive
Hedge Funds
Commodities or Natural Resources
International Bonds – Active
Private Equity
European Government Bonds – Active
Real Estate
European Equities – Active
International Equities – Active
European Credit Bonds – Active
Number of Belgian Investors
Significantly Decrease Significantly Increase
Belgian Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Three year outlook.
Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
17
10
14
13
13
11
10
8
8
10
10
9
11
7
8
8
4
10
No Change
10 CONFIDENTIAL
C.E. Institutional Investors’ Assets
Managed Internally versus Externally –
Matched Sample
63.9% 62.0%
47.9%
10.3% 11.5%
18.0%
25.8% 26.5%34.1%
2009 2010 2011
Pro
po
rtio
n o
f T
ota
l C
.E. A
sse
ts
Discretionary Mandate
Pooled or Commingled Funds
Internally Managed
The trend towards the use of external managers is gathering pace;
Belgian and Norwegian Schemes are least likely to go external
C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by
Country
64.3%80.2%
30.6%49.7%
61.4% 67.0%
9.5%
41.7%
49.4%12.7%
30.6%10.3%
27.7% 25.9% 25.0%
7.9%
Austria Belgium Denmark Finland France Germany
Pro
po
rtio
n o
f T
ota
l C
.E. A
sse
ts
C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by
Country
69.2%50.5%
31.7%
71.3%
45.1% 47.4%
22.2%
25.3%
17.8%
33.3% 29.3%
42.9% 43.0%
10.9%21.6% 23.3%
6.6%
8.6%
Iberia Italy Netherlands Norway Sweden Switzerland
Pro
po
rtio
n o
f T
ota
l C
.E. A
sse
ts
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined
contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Question methodology was changed in
2011 in order to raise the accuracy of responses.
11 CONFIDENTIAL
Asset mix of total DB pension assets and externally managed assets; a
higher proportion of equities than fixed income is externalized
C.E. Institutional Investors Defined Benefit Plan Asset Allocation 2011 – Total Mix versus External Mix, by Type of Institution
11.6% 13.3% 15.2% 15.3%8.5% 10.7%
18.9%22.4%
11.2% 13.7% 25.6%
33.6%
45.6%42.3%
54.6%53.7%
37.8%
27.9%
11.1%14.9% 8.9% 7.5%
13.1%24.4%
6.1%3.8%
7.3%4.6% 5.2%
2.9% 5.5%4.2%4.5%5.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pension Funds -
Total Mix
Pension Funds -
External Mix
Corporate Pensions -
Total Mix
Corporate Pensions -
External Mix
Public Pensions -
Total Mix
Public Pensions -
External Mix
Pro
po
rtio
n o
f T
ota
l C
.E. D
B P
lan
Asse
ts o
r
To
tal E
xte
rna
lly M
an
ag
ed
C.E
. D
B P
lan
Asse
ts
European equities International equities Fixed income Cash Real Estate Alternatives Other
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.
Question methodology was changed in 2011 in order to raise the accuracy of responses.
12 CONFIDENTIAL
6.7%7.1%
3.9%
5.7%
9.1%
6.4%
6.9%
7.5%
4.0%
5.7%
8.9%
6.2%
European
equities
International
equities
Fixed income Real Estate Private
Equity
Hedge Fund
Expecte
d T
ota
l R
ate
of
Retu
rn
2010 2011
C.E. Corporate Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets
C.E. Corporate Defined Benefit Plans’
Average Actuarial Earnings Return on Plan
Assets
Corporate DB plans’ anticipated asset returns fall short of mean actuarial
earnings rates by 20 basis points
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Mean calculation excludes reported answers of "0" and / or "None".
Note: Mean calculation excludes reported answers of "0" and / or
"None".
5.4% 5.5% 5.5%
2009 2010 2011
Actu
arial E
arn
ings R
ate
of
Retu
rn
Actual
expected
rate of plan
return
Current
actuarial
earnings
rate
GAP = -0.2%
13 CONFIDENTIAL
6.6%
7.1%
3.8%
6.4%
9.7%
7.1%6.8%
7.3%
3.9%
5.8%
10.0%
6.8%
European
equities
International
equities
Fixed income Real Estate Private
Equity
Hedge Fund
Expecte
d T
ota
l R
ate
of
Retu
rn
2010 2011
C.E. Public Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets
C.E. Public Defined Benefit Plans’ Average
Actuarial Earnings Return on Plan Assets
Public DB plans’ anticipated asset returns exceed actuarial rates by 50
basis points
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Mean calculation excludes reported answers of "0" and / or "None".
Note: Mean calculation excludes reported answers of "0" and / or
"None".
4.8%5.1% 5.2%
2009 2010 2011
Actu
arial E
arn
ings R
ate
of
Retu
rn
GAP = 0.5%
Actual
expected
rate of plan
return
Current
actuarial
earnings
rate
14 CONFIDENTIAL
DB pension funds will need to unwind passive equity allocations and
increase active equity allocations to reach policy targets
-3.6%
-2.3%
0.2%
1.2%
1.7%
2.9%
3.5%
3.7%
5.2%
9.7%
-1.2%
-4.4%
-5.4%
-5.4%
-5.9%
-15% -10% -5% 0% 5% 10% 15%
European Equities – Active
European Gov't. Bonds – Passive
European Credit Bonds – Active
European Credit Bonds – Passive
Int'l. Equities – Active
European Bonds – Passive
Cash
Int'l. Bonds – Passive
European Equities – Passive
Other
Real Estate
Alternatives
Int'l. Bonds – Active
European Gov't. Bonds – Active
Int'l. Equities – Passive
Current Allocation Less Target Allocation
Currently Underweight
Currently Overweight
Difference Between C.E. Pension Investors Defined Benefit Plan Asset Allocation and
Target Defined Benefit Plan Asset Allocation 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.
15 CONFIDENTIAL
In line with the lower proportion of assets managed externally Belgian
schemes on average use fewer managers than seen in most markets
C.E. Institutional Investors Average Number of Investment Managers Used, by Country
8.6
7.8
6.6
10.6
8.7
6.36.1
8.7
10.4
8.2
0
2
4
6
8
10
12
TotalInstitutions
Austria Belgium France Germany Iberia Italy Netherlands Nordics Switzerland
Num
ber
of
Investm
ent
Managers
2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
16 CONFIDENTIAL
Belgian investors’ use of investment consultants is in line with the
corporate and public pension fund averages in Europe.
C.E. Institutional Investors Using and Expecting to Hire Investment Consultants for
Advice on Investment Matters 2011, by Type of Institution
33%
42% 40% 40%
20%15%
20%
4%
5%5%
3%
4%1%
13%
0%
10%
20%
30%
40%
50%
60%
European
Investors -
Total
Corporate
Pensions
Public
Pensions
Corporate
Treasury
Insurance Banks Savings
Banks
Pro
po
rtio
n o
f C
.E. In
ve
sto
rs
Now Use 2011 Expect to Hire 2011
Belgian Institutional Investors Using
Investment Consultants for Advice on
Investment Matters
31% 31%
50%
43%
0%
10%
20%
30%
40%
50%
60%
2008 2009 2010 2011
Pro
po
rtio
n o
f B
elg
ian
In
ve
sto
rs
Now Use 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: “Now Use” refers to investments used by investors in the past 12 months. “Expect to Hire” refers to expected hiring for investments in the next 12 months.
17 CONFIDENTIAL
Average fees paid to external managers have slipped
Average Fees Paid by C.E. Institutional Investors to External Managers
35.3
41.2
51.9
22.6
32.5
44.6
54.1
24.7
59.3
30.9
41.7
51.1
22.5
44.9
60.5
0
10
20
30
40
50
60
70
All Outside Managers Active European equity Active international
equity
Active fixed income Multi-Asset Real estate
Ba
sis
Po
ints
2009 2010 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Shown in basis points. Mean calculation excludes reported answers of "0" and / or "None".
NA NANA
18 CONFIDENTIAL
In Summary
▪ Each in their own way, DB pension plans continue to struggle with the challenge of closing funding gaps and generating returns required to meet future obligations.
▪ As a consequence, pension plan policies are shifting away from the strong de-risking seen in 2009-2010. International equity allocations have risen and now almost match allocations to domestic equities. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. Anticipated changes include reductions in European government bonds and increases in private equity.
▪ Similarly, pension schemes are more willing to see if outsiders can help generate alpha and diversification. The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income.
▪ Large funds have expanded the number of external managers used, however, on average both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low.
▪ Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are quite dislocated from their policy targets. European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations.
▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment.
19 CONFIDENTIAL
Methodology
▪ From February to May 2011, Greenwich Associates conducted personal interviews with 418 of 709 of the largest institutional funds in Continental Europe.
▪ These institutional investors comprise corporate and public pension funds, corporate treasuries, foundations, insurance companies, and banks with externally managed assets greater than €500 million. In some markets where the universe of large institutional investors is limited, we conducted supplemental interviews with institutions with between €250 million and €500 million in externally managed assets.
▪ Senior fund professionals were asked to provide quantitative and qualitative evaluations of their investment managers, qualitative assessments of those managers soliciting their business, and detailed information on important market trends.
▪ Overall, 59% of institutions targeted participated in our research. Of the 418 institutions interviewed, 96% allowed disclosure of participation and 75% allowed attribution of their individual responses.
Research Coverage of C.E. Institutional Investors 2011,
by Type of Fund
201171
123119 106
24406190
1523345170
Corp
ora
te
Pensio
n
Public
Pensio
n
Insura
nce
Savin
gs
Banks
Banks
Foundations
Corp
.
Tre
asury
C.E
. In
stitu
tions
Universe
Interview ed
Research Coverage of C.E. Institutional Investors 2011,
by Country
10285 83 82
6050
4146
6951 48
111
25304030
191515
2741
57
Sw
itzerland
Germ
any &
Austr
ia
Fra
nce
Neth
erlands
Italy
Sw
eden
Iberia
Denm
ark
Belg
ium
Norw
ay
Fin
land
C.E
. In
stitu
tions Universe
Interview ed
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information.
20 CONFIDENTIAL
Contact Information
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