| Holland's De Eendragt Pensionen decouples from benchmark |
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| 24/02/2008 | |
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Dutch pension fund De Eendragt Pensioen N.V. has just decoupled from its benchmark. At a time when pension funds are having to cope with increased volatility in the equity markets, Philip Menco, CIO and CEO of the fund, recently allocated 25% of its €350m investment portfolio to a new equity hedging strategy that avoids a cap-weighted index. Menco used proceeds from the sale of an enhanced indexing mandate to initiate the position mid-January. He has also built a considerable 15% cash position. He has 25% invested in equities compared to a 45% average for most Dutch pension funds. "We are not very optimistic economically speaking," says Menco. "The credit crisis poses a serious threat and it may well extend into 2009. We do not know when there will be a recovery in equities." Enter the Anti-Benchmark. The mandate awarded to Lehman Brothers Asset Management Paris consists of an equity portfolio and a currency hedging overlay split between Europe (€48m), US (€16m) and Japan (€16m). Anti-benchmarking is a quantitative investment style that allows for a more diversified exposure to equities than market capitalisation weighted benchmarks such as the MSCI. Still mean MSCI country indexes are known to be dominated by a small group of companies during bullish cycles. These companies have large market caps, the result of total share count multiplied by share price. During periods of euphoria passive investors track the large cap company-dominated indexes in order not to under-perform. "There is, however, always mean reversion in markets and very expensive companies become cheaper," says Menco, who joined the fund in 2004, after having headed strategic research at ABP, one of the world's top five pension funds. "When you buy into an index, you invest heavily in companies that have a high likelihood of declining. That is a big disadvantage for indexes, which remain in wide use because investors are largely lemmings." The relatively new strategy does not overweight expensive shares or underweight cheap ones, says Menco. "It does not have a specific sector or style bias. The Dutch stock index, for example, is heavily dominated by financials and their movement is accordingly very dominant in the index." As a quantitative strategy, the strategy tries to minimise correlations between stocks in a portfolio. It leads to lower risk and, by corollary, it helps the fund avoid a sector bubble. Menco estimates that risk is lowered by 3% relative to the MSCI while performance is enhanced by 2% Risk metrics Menco describes the mandate as an alternative beta strategy where the objective is not to meet a benchmark. "Back tests of quantitative strategies are much more reliable in forecasting future returns than tests of judgemental management styles," he says. The strategy was launched by Lehman in June 2006. It is an investment style that shares similarities with fundamental indexation: the two approaches use non-market cap weighted portfolios; however, there are clear differences. Anti-Benchmark does not employ fundamental ratios, making use of risk metrics such as volatility and correlation. Since its inception in September 2006, Lehman's Anti-Benchmark Euro portfolio posted a volatility of 13.51% compared to 17.17% for the Dow Jones Europe cap-weighted index. The returns were 6.27% for Lehman compared to 5.73% for the index, says Yves Choueifaty, Head of Lehman's Quantitative Asset Management Europe, which manages about $1.5bn in assets. VB |
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Articles of the same Topic : Pension funds Western Europe
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