ABP and Calpers outperform, defending funding ratio in volatile market

Even as global indexes posted double digit losses in the first half of 2008, ABP and Calpers outperformed the MSCI All World Country Index by a wide margin. The index was down 13.2% as of July 22 compared to losses of 5% and 5.3% net of fees for ABP and Calpers respectively.

Both pension funds leaned heavily on their diversification strategy to forestall a larger investment loss. “The biggest risk is a systemic one in the financial sector,” says Tom Steenkamp, Chief Investment Officer of Allocation and Research at ABP’s asset management company, APG. At the moment the asset manager of the €205bn Dutch fund is developing a new strategy using two portfolios, one for hedging; the other to achieve higher returns.

The largest negative contributions to ABP’s portfolio, (20% of which is outsourced), came from equities (-14.8%), followed by real estate (-8%). Alternatives posted strong gains, with commodities returning 44.1%, hedge funds 7.2%, private equity 3% and infrastructure 1.3%. ABP has a 3% allocation to commodities. The fund has no intention to widely shift the portfolio’s strategic asset allocation in 2009. Nor has the recent pull-back in oil prices prompted a shift out of commodities. “Commodity prices are in our view high because of imbalances between supply and demand and they will probably stay high for a while,” says Steenkamp.

Alternative investments provided de-correlation and positive returns; however, the portfolio’s largest investments were in equities (36.1%) and real estate (8.8%) which pulled performance down. Another 30.3% is allocated to fixed-income and 7.2% to inflation-linked bonds. The balance is in alternatives, including a 4.8% allocation to absolute return strategies. Hedging  dollar risk also had a positive impact on the investment portfolio during the first half.

Funding ratio 

ABP’s funding ratio, which measures the relationship between assets and liabilities, has been volatile this year as a result of the turmoil in financial markets. At 132%, ABP still comfortably complies with the 125% buffer requirements decreed by law; however, the current ratio may not be high enough to allow for full indexing to compensate for wage inflation. In November, ABP’s board will determine the degree of indexing starting in 2009. The funding ratio stood at 140 at the end of 2007 allowing for full indexation for its members.

The only positive contribution (1.5%) to ABP’s funding ratio came from a 10bp increase in capital market interest rates during the six month period. Calpers’ funding ratio, on the other hand, has remained stable around 93% “and that is not going to change since the previous fiscal year we had a return in excess of 19%, so the last two fiscal years tend to cancel each other out,” says Anne Stausboll, Calpers’ Interim CIO.

Calpers, with €152bn in assets under management, faced a different reality in the past. In previous down markets such as the 2001-02 recession, flat or negative investment returns contributed to increases in employer contribution rates the following year. This led to the development of a smoothing mechanism spread over 15-years by the fund’s actuaries to reduce the volatility of employer contributions during down years. With asset gains and losses spread over a longer period, the funding rate in the current fiscal year has managed to remain at a high level. An average 7.75% return on investments allows Calpers to stay at an acceptable funding level.

Equities were the biggest negative contributors. “Last Fall, we underweighted public stocks and it played a role in moderating the negative impact of equity returns on our fund,” says Stausboll. “We’re moving more money into international sectors.” The board’s recent asset allocation decisions have created a new inflation-linked asset class with a 5% strategic allocation in addition to increasing allocations to private equity and international real estate. These will be funded by reductions in global equity and fixed-income. The fund’s assets are allocated 51.9% to equities, 24.7% to fixed-income, 10.3% to private equity, 9.9% to real estate, 2% to inflation-linked bonds and 1.2% to cash.

VB