INTRO: Faced with worsening traffic congestion, Turkey’s third largest city has embarked upon the construction of a light rail network that will eventually total 50 km. Under a turnkey contract awarded to the ABB-Yapi Merkezi-Adtranz consortium, the first 11·5 km is scheduled to open during 1998 BYLINE: Lennart GunnarssonProject ManagerAdtranz SwedenTURKEY’S RAPID economic development, combined with a huge increase in the population of its largest cities, has resulted in a growing demand for transport. Izmir is already facing worsening traffic congestion, and its population is expected to grow from 2million to 3 or 4million by 2010. With its public transport system close to breaking point, Izmir decided to follow Istanbul and Ankara in adopting light rail.The contract for the 11·5 km first stage of Izmir’s light rail network, which became effective in June 1994, was awarded to the same consortium that built Istanbul’s 19·3 km light metro line – Adtranz of Sweden (formerly ABB Traction), ABB and the Turkish construction company Yapi Merkezi. The long-term plans envisage that this initial section will gradually be extended to a total length of 50 km. The current situation in Izmir, with the number of private cars constantly rising and air pollution steadily increasing, is acute and light rail is seen as representing the most logical, effective and environmentally-sound solution. Comfort, easy accessibility and punctuality have proved extremely attractive to commuters, and shown clearly that it is possible to combine metropolitan life with efficient transport. Speed is another advantage. While car traffic sometimes moves at a modest 10 km/h, passengers on modern light rail lines move along at speeds up to 80 km/h.Izmir’s light rail is designed to offer a relatively high passenger capacity per hour, but at a lower capital cost than alternatives such as heavy metro or suburban rail. Running costs will be kept low through the adoption of energy-saving measures such as regenerative braking; maintenance costs will be minimised by the use of reliable, tried and tested technology. At the same time, the network must be compatible with the existing urban environment and transport system. A challenge facing the contractors is to integrate the light rail line with Izmir’s historic, and in some cases vulnerable, fabric. Stage 1 worksThe 50 km network will eventually comprise a central core route and four branches to the suburbs of
The equity risk class – which makes up the lion’s share of the portfolio, with a 35% target exposure — produced 8.2% over the fourth quarter of 2013.The main driver had been the easing of macroeconomic uncertainty in the US and strong economic indicators, NOW: Pensions said.The rates risk class made a loss of 1.8% in the quarter, as result of “an improving global economic outlook at the Fed’s decision to taper bond purchases”, it said.Inflation delivered a flat return of 0.11%, hit by the European Central Bank’s interest rate cut in November, and the credit risk class returned 2.5%.Commodities made a flat return, the company said.The low-cost fund – which has an annual management charge of just 0.3% – has an objective of returning 3 percentage points more than cash, as measured by the Sterling OverNight Index Average (SONIA), over a rolling five-year period, the company said.In 2013, SONIA plus 3% was 3.44%, according to NOW: Pensions.The DGF currently has less than £50m (€61m) in assets. NOW: Pensions, the UK multi-employer trust launched by Denmark’s ATP, generated a return of 9.1% in 2013 on its diversified growth fund (DGF) – the only investment option available for members.In the first year of the fund’s existence, the return was lower than the 10.56% return reported for the model portfolio the company ran in 2012, according to data on the company’s website. It was also lower than the 60/40% equity/bond portfolio NOW: Pensions compared its return with, which produced a 11.98% profit on investments.In line with the approach of its parent, Danish statutory pension fund ATP, NOW: Pensions divides investments in its DGF into five risk classes rather than using traditional asset class labels.
Leading institutional investors increasingly see themselves in partnership with their hedge fund managers, according to a new report from Barclays and the Alternative Investment Management Association (AIMA), and both sides enjoy the benefits of greater knowledge sharing and customisation of services.‘The Extra Mile: Partnerships between Hedge Funds and Investors’, represents the first collaborative effort from Barclays’ capital solutions team, which publishes frequent hedge fund industry reports.It was based on interviews with 30 investors, responsible for $2trn (€1.5trn) of assets and $260bn of hedge fund investments, the majority of which sit on AIMA’s Investor Steering Committee.The sample was globally diversified – 40% were pension funds and a further 17% were consultants. The hedge fund managers interviewed were, in some cases, singled-out in the investor interviews as leaders in the partnership trend.In the foreword to the report, Michelle McGregor-Smith, chair of the AIMA Investor Steering Committee and chief executive at British Airways Pension Investment Management, said: “What we have found is that investors are increasingly striking up partnerships with hedge funds.“These partnerships take many forms, including the sharing of knowledge, the building of more customised products, co-investment, product seeding and equity investment.”Ermanno Dal Pont, head of capital solutions for Europe at Barclays, sees the partnership theme as a natural outcome of the institutionalisation of the hedge fund client base over the past 15 years.“Institutional investors see hedge funds as ‘centres of excellence’ – identifying specific risks they want to take and then looking for excellence in those risks within the hedge fund industry – and real partnership is seen as an opportunity to improve their own investment practices,” he said at the launch of the report in London.“By thinking about hedge funds in these terms rather than as a range of products, they also enhance the ability to create tailored strategies. All of this is seen as a way to extract more value from the managers for the fees they are paying.”As one $100bn pension fund put it: “The ability to get portfolio managers on the phone once a month and share insights is very important – it helps us figure out what our next investment is going to be.”Jack Inglis, chief executive at AIMA, added that he was encouraged by the trend.“These arrangements represent a win-win for both sides, with significant benefits for both the manager and the investor,” he said.Hedge fund managers value the stability of partnerships because theirs is a much more volatile business than traditional long-only asset management, but they also see the ability to offer genuine partnership as a valuable differentiator.Pro-active client servicing, backed-up by genuine understanding of investors’ needs and managers’ capabilities, is regarded as necessary but not sufficient for maintain real partnerships.Managers need to show they are thought leaders in their area of expertise by publishing research that sets the agenda for the client base.“If you don’t show me you have the expertise, you will not be the firm I go to with my problems or challenges – you are not a potential partner,” as Dal Pont put it.He cited one investor that identified a particular manager for its risk management excellence, and asked the chief risk officer to audit its own processes and systems.More than half of the institutions interviewed mentioned the importance of managers being able to offer either co-investment (in illiquid opportunities) or customisation (of more liquid strategies).“This is really at the core of what partnership means,” said Dal Pont.The partnership theme is most important for larger multi-strategy, macro or fixed income managers, but Dal Pont emphasised that boutiques and managers of niche strategies still had a role.Indeed, he pointed out that some of the largest and most sophisticated institutional investors say the most valuable expertise comes from these managers precisely because they already have many of the other capabilities in-house.It is a different model of partnership – a smaller staff means less emphasis on demonstrating thought leadership, but a smaller client base can facilitate more access to portfolio managers.“This is not a free lunch,” Dal Pont said. “If you want to develop partnerships with investors, you will have to invest – in staff, in research, in enhanced client service and risk management.“For that reason, you need to be careful to focus on those elements of partnership that work well with the kind of business you are and the types of strategy you offer.”Not all hedge fund managers see a role for themselves in the partnership theme – about 25% of those interviewed downplayed its importance.Among these, most said that, because they could not practically be partners with all of their clients, focusing on delivering a good product for all of them was the only way to treat customers fairly.Some simply felt success would come as long as they focused on performance, and a few felt the level of transparency required to offer co-investment or customisation could be a threat to their ‘edge’ or intellectual property.Others cited their small size, suggesting partnerships might be more feasible as they grow.
The Dutch pensions industry should slow the pace of consolidation and start examining defined contribution (DC) solutions with individual contribution rates seriously if it wishes to prosper in future, according to a group of academics and industry professionals.Speaking in the September issue of IPE magazine as the government begins a wide-ranging, three-month dialogue with the public on the future of the pension system, the panel questioned whether the Dutch approach to solidarity could endure and warned that beneficiaries faced a decade without indexation due to proposals contained within the new financial assessment framework (FTK).Alfred Slager warned that the current emphasis on consolidation, triggered by regulator De Nederlandsche Bank’s insistence on minimum standards for board members and solvency requirements, could cause problems.The professor of pension fund management at Tilburg University accepted that a minimum pension fund size was “a good, efficient thing to have”. “However,” he said, “without a clear vision on consolidation, the sector might drift towards an outcome with unintended consequences: a small number of pension funds managed like large financial institutions, potentially stifling much needed innovation.”The academic also warned that consolidation could introduce macro-economic risk into the pension system, akin to the risks seen in the insurance and banking sectors.Hans Rademaker, member of the management board at asset manager Robeco, identified other problems stemming from the new FTK.According to him, the proposals are “more of an evolution, rather than the necessary revolution”.He said there was a need for more clearly defined ownership rights for members, and that the way forward should be “a blend of the best” of DC and defined benefit (DB) systems, allowing individual accrual but also risk-pooling when the beneficiary begins drawing down entitlements.Meanwhile, Keith Ambachtsheer, director emeritus at the Rotman International Centre for Pension Management, argued that the problems were the result of “the Dutch tendency to love ‘solidarity’ too much”.He said younger generations would reject the current system and oppose the “faux solidarity” resulting from the need to underwrite the risks of older generations.However, he said he was hopeful change was possible.“Managing [a] transformation will require strong leadership,” he said. “I am betting it will emerge soon.”PGGM’s head of strategic consulting, Erik Goris, said he viewed the system’s biggest problem as its social sustainability, as job mobility and a greater desire for freedom of choice grow in importance.“A culture change is needed, and we will help ourselves greatly if we dare to think in terms of a DC-type of solution,” he said.“Indeed, such a system answers better to today’s social questions.“Preserving the current system’s benefits of collectivity and risk sharing will be the challenge.”Goris also warned that the revised FTK brings with it increasingly complex rules to ensure pension promises are sustainable, and said that, as a result, pensions will become more complicated to explain.Additionally, the increased security of the FTK will lead to prolonged periods without indexation, as the security to preserve purchasing power will “prove unaffordable”, according to Peter Borgdorff of healthcare scheme PFZW.“As a result, the participant will end up paying for the government’s plans by means of a structurally lower pension,” he said.For further expert opinions on the Dutch pension system, see the current issue of IPE magazine
Changes in the institutional investment industry since the late 1990s towards the “endowment model” have led to intricate risk controls that have ultimately damaged investment portfolios, according to the CIO of a major US public pension fund.Bob Maynard, CIO of the Public Employee Retirement System of Idaho, said: “The best risk control lies in being able to see an entire portfolio easily and being able to spot deviations from the expected without difficulty.“Transparency should, therefore, be the primary method of risk control in most portfolios.”Maynard has produced a paper in which he asserts that investors and asset managers have lost sight of the conventional portfolio principles of simplicity, transparency and focus. He said increasing complexity in today’s investment environment did not mean investors had to respond in a complex way.With a simple, transparent style or portfolio, with daily and independently priced securities, activity can easily be monitored at the time, said Maynard, who is a member of the international 300 Club of top investment professionals.“Unexpected behaviour, if it occurs, is instantly clear, and explanations for unexpected behaviour can be quickly determined,” he said.Maynard said the conventional model of investing “came under severe attack” in the late 1990s and 2000s because the long-term views of the capital markets and the shorter-term behaviour of those markets were growing further apart.This, he said, had resulted in the adoption of the endowment model of investing, which emphasised intense active management, illiquid instruments and vehicles, and used leverage, as well as many detailed and often opportunistic investment strategies. “The events of 2008-09 showed that, both in theory and in practice, the endowment model failed its first stress test miserably,” Maynard said.Markets were extremely volatile, he said, and there was no place to hide. “Many of the places where the new model took shelter turned out to be stunningly worse,” he added. He said the problem was there were no risk systems that could currently be based on the mathematics of the “non-linear world”. “Instead, the only usable tools are risk measures that are based on the assumptions of coin-tossing randomness (such as value at risk, or VaR), linear relationships (such as regression analysis, factor analysis, and concepts of alpha and beta), and the successful identification of potential future stresses and strains on the portfolio (scenario analysis and stress testing),” Maynard said. These systems could be badly fooled in a non-linear and turbulent market structure, he said.
“In the long term, this is not a positive thing, especially if the economic growth does not get a second wind in Europe or continue to remain at least moderate in the US and developing markets,” she said.“We have, essentially, gotten our future returns in advance.”Hanna Hiidenpalo, CIO of the €19.6bn Elo, also warned that 2015 would see returns fall short of the levels investors had grown accustomed to, with the mutual saying in a statement that the outlook for its native Finland was “very bleak […] and even bleaker than for the rest of the euro area on average”.Hiidenpalo added: “Economic development and the investment environment involve an exceptionally large number of uncertainties, such as the actions of the US central bank the Fed, movements in oil prices, the state of the Chinese economy and the political developments in the euro area.”Elo, completing its first full year since launching on back of a merger of LocalTapiola and Pension Fennia, said equities were its best-performing asset class, returning 9.8%.It particularly praised its unlisted and private equity investments, which returned 26.8% and 18.9%.The €5.7bn Etera saw full-year results for 2014 rebound from just 0.3% in 2013, with managing director Stefan Björkman highlighting its focus on Finnish holdings, where 40% of assets were invested.“We invest in Finland especially through private equity and debt and real estate investments,” he said.“Also last year, we made several new investments in Finnish growth companies.”For her part, Bergring repeated praise for the recent intervention by the European Central Bank, expressing hope that the asset purchase programme would support growth.“The ECB stimulus plan specifically supports this type of emerging growth in lending and is necessary in Europe’s current weak economic situation,” she said.She previously told IPE she had been “disappointed” with Germany’s resistance to the ECB’s launching a quantitative easing programme.For more of Niina Bergring’s outlook for 2015, read her thoughs in a recent issue of IPE magazine The decline in inflation expectations and economic growth has seen Veritas receive its future returns in advance, the Finnish provider’s CIO has warned.Niina Bergring nevertheless said Veritas Pension Insurance’s results were “especially good”, coming in at 6.4% across its holdings.Its results were in line with two of the country’s other providers, Etera and Elo, which saw returns of 6.2% and 6.3%, respectively, over the course of 2014.Bergring struck a note of caution, saying the yields were primarily the result of deteriorating economic conditions and inflation expectations.
Danish labour market pension fund Sampension is to put more money into alternatives including real estate over the next five years, boosting the allocation to between 20% and 25% of total assets, and is hiring four extra people on its alternatives team.Reporting interim results, chief executive Hasse Jørgensen said: “We will have the skills to deliver high stable returns for customers over the coming years.”In order to make this happen, the pension fund was preparing its alternative investments team, along with other other parts of the organisation.Jørgensen told IPE Sampension was adding four new staff to its alternatives team, and two of these were already in place. Over the next five years, the pension fund would invest DKK15bn (€2bn) in alternatives, he said, which would bring the allocation — including real estate — to between 20% and 25% from just under 20% now.Some of this DKK15bn would come from new money, and some would be re-investment from other areas, such as private equity investment funds that had matured, he said.“We are giving alternatives a higher priority,” Jørgensen said.In its first half results, Sampension reported a loss of 0.7% for traditional with-profits pensions before pensions tax, after a 10.9% profit in the same period last year.Even though the investment portfolio had generated a 2.2% return in the period, the hedging portfolio ended in June with a 3.8% loss as a result of higher long-term bond yields.Sam pension’s business income rose, with pension contributions up 3.2% compared with the same period last year to stand at DKK4.0bn at the end of June.The pension fund said the addition of the new pension fund for IT group KMD at the beginning of this year had helped to reverse the trend in falling contributions.However, Jørgensen said that structurally, Sampension was facing falling levels of contributions as its membership aged and moved into retirement.“This is a very long-term issue, but it has made us start thinking and take some action in order to at least maintain the critical mass we have at the moment,” he said.“We have been moving into the area of corporate pensions and won some bids there, and we are going to continue to do that in order to keep up our premium income,” he said.Mergers were also a possibility, he said.The most obvious candidates for partners would be smaller pension funds, of which there were many in Denmark he said.These funds were finding conditions difficult, especially with the implementation of Solvency II regulations coming up next year, he said.“We would expect to be able to help a number of smaller pension funds, but obviously that is their decision,” Jørgensen said.Sampension’s total assets decreased to DKK255bn by the end of June from DKK257bn at the end of December 2014.Its solvency, meanwhile, rose to 309% from 270%, according to interim data.
A slight rise in the discount rate reduced liabilities in DAX companies by almost 5%, or €18bn, to approximately €354.2bn.In 2014, however, the companies suffered a liability increase of nearly 300 basis points.Positive returns came mainly from European and global equities, with each segment producing an average 10% return and both jointly accounting for one-quarter of Willis Towers Watson’s model portfolio.REITS, representing just under 5% of the model portfolio, returned more than 18%.Willis Towers Watson said most institutional investors were investing in closed-end funds or holding real estate directly, adding that details on the real estate portfolios were not disclosed in the annual reports.Thomas Jasper, head of retirement solutions at Willis Towers Watson, said: “Over the short term, plan assets can be expected to be more correlated to equities, but, over the long term, there will be more correlation to alternative asset classes.”He said the improvement in interest rates and, in turn, the increase in discount rates were “a positive sign for occupational pensions”.He noted, however, that small and medium-size companies using the HGB discount rate, based on a historical average, were still facing another decrease in the rate, as pre-crisis years were falling out of the average.The German government has now decided to increase the calculation period for the average from seven to 10 years.For more on the discount rate under the HGB accounting standard, see the April issue of IPE magazine The pension funds of companies listed on Germany’s DAX stock exchange are more than 65% funded, an increase of 5 percentage points compared with the end of 2014, according to estimates by Willis Towers Watson. The consultancy’s ‘German Pension Finance Watch’ calculated an overall average return of 1.7% over the period and a nearly 50-basis-point drop in liabilities. Looking at the pension liabilities of German listed companies based on model portfolios and annual reports, Willis Towers Watson found that the average discount rate, or Rechnungszins, increased from 2.15% at end-December 2014 to just over 2.3% a year later.For its calculations, the consultancy employed the median discount rate published by the listed companies, determined according to international accounting standards.
Funding across German corporate pension plans has declined significantly over the second quarter, as Willis Towers Watson (WTW) blamed the impact of the European Central Bank’s (ECB) policies and the UK’s decision to leave the European Union.According to the consultancy’s German Pension Finance Watch estimates, pension assets across Germany’s DAX and MDAX stock markets remained broadly stable over the second quarter, standing at €237bn at the end of June across all DAX companies.However, liabilities rose by 7% as a result of a 42-basis-point drop in the actuarial discount rate, to 1.7%, since March – meaning the discount rate has fallen 0.7 percentage points since December last year.Thomas Jasper, the consultancy’s head of retirement for Western Europe, said: “This decline can be traced, for one, to the interest rate policies implemented by the European Central Bank and the US Federal Reserve but also to the increasing interest in safe haven assets. “The widening of the ECB’s quantitative easing and the market turbulence triggered in the wake of Brexit has seen interest in AA bonds, crucial for determining interest rates, increase further.”Despite the market turbulence outlined by Jasper, the consultancy estimated assets within DAX occupational schemes rose to €237bn at the end of June, an increase of 0.7%, while the pension assets of MDAX companies remained stable at €27.8bn.As a result of the 7% increase in liabilities, WTW further estimated funding across DAX occupational schemes now stood at 55.3% – down by 3.5 percentage points compared with March, while MAX companies saw funding decline by 2.7 percentage points.The fall in funding levels comes only a few months after the German government amended the discount rate, or Rechnungszins, dictated within the HGB, the country’s accounting law, to allow for rates to be smoothed over a 10-year period to offer the occupational pensions sector some relief in light of ever-lower interest rates.
Source: © Banque de FranceThe bank expressed three main commitments in the charter and said it would report annually on its progress in implementing them.The commitments are to reinforce the integration of ESG factors in investment decisions, advance its investment portfolios’ contribution to “the environmental transition”, and pursue best practice in public reporting and other areas of responsible investment.Each commitment was further broken down into “actions”. Under the heading related to the environmental transition, for example, the bank said it would work on analytical tools and environmental impact indicators to enable it to progressively align its investments with a maximum 2°C global warming trajectory.In addition to setting out various international norms that its investments would respect – such as the Oslo convention on cluster munitions – the bank’s charter stated that it would not invest in coal miners or energy producers that derive more than 20% of revenues from thermal coal. It also prohibited investments in financial instruments that enabled speculating on agricultural commodities.The bank said its responsible investment charter was in line with its fiduciary responsibility as a long-term investor and its mission to contribute to financial stability. The latter required managing environmental risks. According to the bank, the responsible investment charter reflects and “amplifies” its existing work on integrating environmental, social and governance (ESG) factors in the management of its assets. The French central bank has adopted a responsible investment charter that will govern the management of some €20bn of assets.The charter is part of Banque de France’s vision of its corporate social responsibility, which it formally documented in a charter at the end of 2016.The central bank said its responsible investment charter reflected an ambition to be “exemplary” in how it took into account its corporate social responsibility “in all its dimensions” and applied this to its role as an institutional investor.The responsible investment policy covers the bank’s own funds, including pension assets. A spokesperson for the bank told IPE that it applied to close to €20bn of assets as at the end of December, around two-thirds of which were in portfolios linked to pension obligations.