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ETF managers show ‘vast’ differences replicating Europe, emerging markets

first_imgThis differs drastically to research on emerging market indices, which showed managers displayed “very divergent tracking qualities”.The spread in tracking differences between the largest seven MSCI Emerging Market ETF managers went as high as 30 basis points, compared with around 14bps for the MSCI Europe index.It also discovered trading volumes for ETFs following MSCI Emerging Markets were too low to allow for institutional sized orders.Managers are more divergent tracking emerging market stocks over European stocks due to the compilation of the ETF.Institutions must decide whether to replicate the index directly by holding securities, have sample replication or track the index using swaps and futures.Direct replication and the use of derivatives provide a more accurate tracking but are costly compared with sampling, which can incur a higher tracking error.The emerging market index added complexity covering 27 countries, as well as a range of markets operating different currencies, and offer fewer derivatives.Arnaud Lilas, head of ETFs at Lyxor Asset Management, said: “ETF managers need to decide on the number of components in the fund, and the quality of tracking. Different managers make different choices.”He said in Europe, the market is significantly more efficient, has a greater use of derivative trading with managers more dividend focused, and securities lending, making tracking easier.“It’s a difference in the complexity of the indices,” he said.Koris’s research also highlighted the five largest European equity ETFs trade, on aggregate, more than $10m (€7.3m) a day.“This means liquidity is there on the secondary market, even for institutional-size orders,” the report said.It also noted that, even with roughly $3.3bn invested in MSCI Europe ETFs, only one fund had amassed more than $1bn in assets. The difference in quality between exchange-traded fund (ETF) managers tracking European and emerging market indices is vastly different, as the Continent’s index proves easier to replicate, research shows.Analysis conducted by Koris International, an investment adviser, found European equity ETFs showed managers had close to zero tracking error and a low tracking difference.The tracking difference calculates the drag resulting from all costs and can be interpreted as the difference from the index an investor would expect, on average, if invested for one year.Koris’s analysis also showed little difference between managers’ performance, meaning investors would not be significantly affected by choosing one over another for European equity.last_img read more

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Mandate roundup: IPE-Quest, UZ Gent, Vanguard, Dimensional, Northern Trust

first_imgA European pension fund is seeking a manager to oversee a $100m (€73.4m) US and European high-yield corporate debt strategy, using IPE-Quest.The pension fund behind search QN1416 did not provide a benchmark, but said it would be hoping for a return of 10% per annum.The fund added: “We are searching for an experienced direct lending manager. Bank loans experience is fine, but the mandate should explicitly contain only middle market loans and direct lending in the US and Europe.”No minimum asset under management limit was specified for either the strategy or the manager, but the company should have at least two years of experience and preferably five. Interested parties have until 15 June to apply, stating their gross of fees performance to the end of March.In other news, a Belgian pension fund has increased its emerging market (EM) exposure, appointing Vanguard Asset Management in an attempt to diversify its holdings.The €445m Pensioenfonds UZ Gent, a defined benefit fund supplying first-pillar benefits to civil servants working at the university hospital, has awarded two mandates worth close to 10% of its assets.Carl Vanlerberghe, a member of the board of directors at the Pensioenfonds UZ Gent, told IPE Vanguard had been appointed to a €9.2m passively managed emerging market equity mandate.He said the pension fund’s board of directors last year decided to terminate one of its equity mandates, worth about €40m. A part would be committed to EM equity.“Up till now, there was very little exposure to emerging market equity in the portfolio,” he said. ”The Board wanted to introduce some greater diversification by appointing a manager for emerging market equities for 3% of the total assets. The Board, however, choose to do this in a passively managed mandate.”Dimensional Fund Advisors was appointed to the second, more sizable actively managed global equity mandate worth €31m.Lastly, Menzis, a Dutch health insurer, has selected Northern Trust Global Investments to manage its more than €400m passive equity portfolio benchmarked to the Dow Jones Sustainability World Enlarged Index.The fund is the first custom index mandate to be managed to the Dow Jones Sustainability World Enlarged Index and incorporates additional ESG criteria.The IPE.com news team is unable to answer any further questions about IPE-Quest tender notices to protect the interests of clients conducting the search. To obtain information direct from IPE-Quest, please contact Jayna Vishram on +44 (0) 20 7261 4630 or email jayna.vishram@ipe-quest.com.last_img read more

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Aegon promises to increase pensions for Dutch miners’ schemes

first_imgBoth Algemeen Mijnwerkersfonds (AMF) and Beambtenfonds voor het Mijnbedrijf (BFM) – which have combined assets of €950m – joined Aegon on 6 August in one of the largest transfers of pension assets to an insurer to date.AMF had a coverage ratio of 113.7% at July-end, while the BFM’s funding was 106.7% at the time, after a two-stage rights discount of 7.6% in total.AMF chairman Fer Pfeiffer, speaking for both schemes, said the difference in the rights increase was due to BFM’s having to make proportionally larger financial provisions for costs and longevity risk.Both pension funds stressed that their administration and service provision would remain with their current provider AZL for at least eight years.The miners’ schemes originally set up AZL – now an ING subsidiary based in Heerlen – 50 years ago.The €820m AMF returned 0.5% last year, while BFM’s return was flat in 2013.AMF and BFM have more than 26,700 and 2,200 participants, respectively. Aegon has said it plans to increase the pension rights of the 29,000 pensioners and deferred participants of the Dutch miners’ schemes AMF and BFM by 8% and 10%, respectively.The one-off increase will be paid from the financial buffers the closed schemes were required to maintain by law, in order to provide for nominal pensions.Insurers do not have to keep such financial reserves.A spokeswoman said Aegon would be able to spread a number of risks across more than 900,000 participants at 40 pension funds.last_img read more

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ECJ backs Romanian Competition Authority in second-pillar case

first_imgIn September 2010, the Competition Authority fined 14 pension companies a total €1.2m for concluding agreements to share, on a 50-50 basis, clients who had signed more than one affiliation, thus avoiding CNPAS’s allocations.The following month, ING Pensii, which received the biggest fine, sought to annul (or alternatively partially annul) the Competition Authority’s decision before the Court of Appeal, Bucharest.ING argued that the agreements did not breach Romania or the EU’s competition regulations.Specifically, it argued that the sharing of clients registered as duplications fell outside the definition of “agreements, decisions and concerted practices”.It also claimed that, over the initial application period, the funds remained in competition with each other.In 2012, the Court dismissed the appeal, after which, in 2014, ING took the case to Romania’s High Court of Cassation and Justice.ING’s arguments included the issue that the small number of duplications (less than 1.5% of the market) was not the subject of competition; that ING had no practical or economic reasons in the allocations as it already had, as of October 2007, the biggest market share; and that the agreements made the signing procedure more efficient because participants had a greater chance of joining a fund of their choice than would have been the case with a random allocation.The cassation court stayed proceedings and asked the ECJ for a preliminary ruling on whether the number of clients involved was relevant in deciding whether EU competition law – specifically Article 101(1) TFEU – was distorted.The ECJ ruled that the number was irrelevant.It deemed that the client-sharing agreements were collusive, made ahead of the affiliation process in anticipation of some people signing up to more than one company, contrary to the statutory rules applicable and thus detrimental to other companies operating in the market.Distortions of Article 101(1) TFEU require that the agreements in question affect trade among EU member states.The ECJ deemed that, although the pension funds were registered in Romania, members, their employers and the pension funds owners could be registered in another member states.Additionally, the agreements made it more difficult for companies outside Romania to penetrate the Romanian market, essentially restricting EU internal market competition. The European Court of Justice (ECJ), on 16 July, backed Romania’s Competition Authority over its actions against a number of pension funds sharing out clients at the start of the country’s second-pillar system.Initial applications for the second pillar, obligatory for those aged 35 years and under, took place between 17 September 2007 and 17 January 2008.Under Romanian law, workers had to conclude an agreement personally with a single fund or, if they failed to make a choice, be allocated to one on a random basis by the National fund for pensions and other benefits (CNPAS).Duplicate applications were deemed invalid and were likewise allocated by the CNPAS.last_img read more

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Long-dated UK bonds drive 20% return at BBC Pension Scheme

first_img“It has not bought more UK government bonds at current yield levels.”The performance marked the sixth successive year of positive returns, with the fall in yields on long-term UK Gilts and index-linked Gilts corresponding to a short-term return and rise in asset value.This, however, failed to help the scheme meet its 24% benchmark target. Liabilities also increased over the period.The scheme has built up its liability-driven investment (LDI) portfolio over the last two years, with its annual report suggesting it was now £1bn better off for having increased exposure without significantly reducing growth assets.Despite global equities returning 16.6%,10 percentage points above UK equities, the scheme still reduced overall exposure to the asset class by 5.1 percentage points.The scheme now has a 28.4% equity allocation – 10.5% in the UK and 11% across the US and Europe.Return-seeking bond exposure rose to 7.5% from 6.6%, while private markets rose to 22.5% from 19.9%.The main change in asset allocation came in index-linked UK Gilts, forming part of the scheme’s LDI portfolio.The scheme now holds 33.9% of its assets in inflation Gilts compared with 23.5% in 2014 – stemming mainly from trimming equity holdings.It holds £4.2bn in UK index-linked government bonds compared with £336m in UK corporate bonds.As of April this year, the scheme still had a funding shortfall of around £2bn.The scheme, which closed to new entrants in late 2010, is planning to offer around 16,900 members the chance to take part in the pension increase exchange, which, at retirement, sees members offered higher up-front benefits at the cost of future statutory increases to inflation. The £12.9bn (€17.6bn) BBC Pension Scheme returned 20.1% over the year to April, backed by its exposure to long-dated UK bonds and global equities.The pension fund for employees of the UK’s public broadcaster, however, said the long-dated bonds, while adding to performance, also hampered the scheme’s ability to meet its 2026 funding target.Chairman Bill Matthews said property, infrastructure and private equity also played a role, as did the pension fund’s lack of exposure to commodities.“The scheme reduced its equity exposure when the market was high and purchased assets that offer the prospect of stable long-term cash flows, such as UK corporate bonds, infrastructure investments and properties with long leases,” he added.last_img read more

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Norwegian oil fund divests 73 companies on environmental risk grounds

first_imgIn the foreword of NBIM’s second responsible investment annual report, chief executive Yngve Slyngstad said it expected companies to address a “broad array of risks” in its business plans.“We urge the companies we invest in to think long term,” he added. “They should build sustainable strategies and business models that are profitable over time.”As part of its engagement efforts, NBIM voted on more than 112,00 resolutions during 2015 and had 3,500 company meetings.It also noted a victory for its attempts for improved proxy access to US companies, saying that approximately one-quarter of its US equity holdings had amended by-laws allowing for proxy nominations for alternative board candidates.Coming alongside the publication of the responsible investment report, NBIM also detailed its approach to human rights, and how it expected companies in which it invested to tackle the matter.The document added: “Boards should ensure the company has a policy to respect human rights and that relevant measures are integrated into corporate business strategy, risk management and reporting.” The Norwegian sovereign wealth fund divested 73 companies last year due to environmental or governance concerns, with a company’s level of carbon emissions responsible for the largest share of equity sales.Arguing that companies with high carbon emissions, either as a direct result of their operations or due to activities of their supply chain, were at greater regulatory risk than lower-emitting companies, the NOK7.1trn (€733bn) Government Pension Fund Global sold its stakes in 42 firms.The divestment brings to 66 the number of companies sold due to their carbon footprint and sees the category account for more than one-third of the 187 companies excluded by Norges Bank Investment Management (NBIM) on risk grounds.Companies were also excluded due to their business activities leading to deforestation, or the business model being exposed to the risk of increasing water prices, while the risk of corruption led to the exclusion of five companies.last_img read more

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Asset management roundup: Investment Association, Oxera, Moody’s

first_imgLuis Correia da Silva, partner at Oxera, said the report differed from much research because of its focus on how asset managers contributed to the efficient allocation of capital, especially on their role in distributing capital to companies.“This role of asset management is particularly important during periods when bank lending has been reduced, creating a funding gap,” he said.“Much of that gap has been filled by direct lending and equity investment by asset managers.“Based on data collected for this study, it is estimated the new funds channelled to businesses by asset managers were equivalent to around a third of the value of total UK business investment in 2014.”The report also claims asset managers hold UK equities for around six years on average.This, said Jonathan Lipkin, director of public policy at the IA, is “much longer than commonly supposed”.The asset management industry was included in an action plan launched by the association in March to boost long-term investment in the UK economy. In other news, credit ratings agency Moody’s has said traditional active asset management “will likely have to shrink substantially”, and will probably lose market share to exchange-traded funds (ETFs) and smart beta.It said the shift into lower-fee passive investment products since 2007 was not temporary, and that the share of passive investing was likely to grow further.It made the comments in a global asset management sector note, although the market share figures it cited were for the US mutual fund industry.According to Moody’s, the shift into passive investing is fuelled by factors such as that “the vast majority of active managers, and the industry in aggregate, consistently underperform passive, indexed investments”.The high fees of actively management funds “are also more noticeable and impactful to investors” in the prevailing low-yield environment, it said.Regulation on transparency of costs and disclosure of fees is another driver, according to the agency.Traditional active asset managers’ revenues have decreased as a result of the shift to passive, it said, adding that some traditional active managers were trying to adjust their business models in response.“A number of active managers that had not previously offered passive products have recently altered their strategies and either made acquisitions or created new products to address the shift from active to passive investing,” said Moody’s. “Much of this investment has been in ETFs and smart beta, which are likely to take share from traditional active management.”However, because quantitative investing is also scalable, “the large number of smart beta managers is also likely to shrink to a few surviving winners managing large amounts of capital”. The UK asset management industry is estimated to have provided some 60% of the financing raised by UK companies in the capital markets in 2013-14, according to a study commissioned by the Investment Association (IA).The study, carried out by the consultancy Oxera, looked into the role of asset managers in channelling money to public and private companies.It estimates UK asset managers were responsible for funding 65% of bonds issued by corporates in 2013-14, and some 40% of the cash raised by share issues on the stock market.“Overall,” Oxera said in a statement, “asset managers provided £119bn of the £200bn raised on capital markets in the period, equating to 60% of all financing.”last_img read more

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KLM resolves pensions dispute with cabin staff over contribution

first_imgShe said the summons the VNC issued against the airline and the pension fund was no longer necessary, but she added that the union did not want to cancel it at this stage, “as we want to be sure KLM does not cut corners in implementing the agreement”.According to the VNC, KLM unilaterally decided to abandon an agreement that the airline would plug funding gaps.KLM, however, insisted that it had agreed with unions that shortfalls would be resolved through “natural recovery” – i.e. returns on investments.The pension fund, for its part, said it would implement the contract – concluded between the airline and the scheme – that failed to provide for a recovery contribution from the company.As a consequence, the VNC had demanded that KLM and the pension fund produce in court the documents on which they had based the new contract.The VNC said a resolution of the dispute would be conditional on starting negotiations with KLM on a new collective labour agreement (CAO), focusing on the airline’s plan to reduce the number of staff on flights.Meanwhile, a separate disagreement over pensions between the airline and its pilots is ongoing.A court recently blocked KLM from launching a new pension fund for its flight staff in a bid to circumvent the issue of additional contribution.At the moment, the airline, which terminated its contract for pensions provision with the pilot scheme as of 1 December, is weighing it options. KLM appears to have resolved a pensions dispute with the union for cabin staff after the airline offered the Pensioenfonds voor Cabinepersoneel an additional contribution of €12m.Commenting on the deal, union VNC cited a “breakthrough” and confirmed that the company had offered “future-proof arrangements without additional conditions” for both staff at KLM and its subsidiary Cityhopper.Fellow union FNV Cabine said it also supported the deal, which met the unions’ demands.Annette Groeneveld, the VNC’s chair, said KLM had agreed to raise the contribution from 34% to 40.9%, which she said was necessary to finance the new collective defined contribution plan for cabin staff.last_img read more

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EIOPA plays down impact of IORP II sustainability rules

first_imgAn amendment to IORP II addressing sustainability matters would not have to mean “a major overhaul”, according to the chairman of the European Insurance and Occupational Pensions Authority (EIOPA).Speaking to journalists at the supervisory authority’s annual conference in Frankfurt, Gabriel Bernardino said that, if EU legislators voted to empower the European Commission to issue rules on sustainability under the IORP II directive, this would not mean “a huge disruptive change”.It was more a case of “fine-tuning” and including a reference to the need for pension funds – and insurers – to consider environmental, social and corporate governance (ESG) factors in their risk management, he suggested.It was also meant to ensure that “these elements related to the necessary analysis of risk related to ESG factors should be included in the way that both insurers and pension funds work on a daily basis”, he said. Gabriel Bernardino addresses EIOPA’s 2018 conferenceWhether or not the Commission is empowered to make such an amendment depends on the outcome of an EU legislative process related to its sustainable finance action plan. Members of the European Parliament recently narrowly voted against an amendment to remove delegated acts in IORP II from the one of the proposals, retaining the text proposed by the Commission.However, several member states – France, Germany, the Netherlands and Sweden – have written to the Austrian government, which has the rotating presidency of the EU Council, to ask for the delegated act concept to be deleted.There is concern in some jurisdictions that amendments made via delegated acts will result in prescriptive rules without any room for national implementation, and that the same set of rules will be issued for both insurers and pension funds.IORP II includes several new ESG provisions related to areas such as risk management, but it does not require the integration of ESG criteria in investment decisions. EIOPA has been asked by the Commission to deliver technical advice on potential amendments to EU rules requiring the integration of sustainability risks in investment decision-making. The mandate relates to the Insurance Distribution Directive and Solvency II, but EIOPA has also been asked to bear in mind that a so-called “delegated act” could be adopted under IORP II.last_img read more

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Brexit: Nordic pension funds reveal their approaches to UK assets

first_imgCredit: Patrick FrostNiina Bergring, VeritasNiina Bergring, CIO and deputy CEO of the fund, said the assets were invested in equities, real estate and investment grade credit. The portfolio’s exposure to the UK had not been changed as a result of the 2016 referendum.“All of our UK investments come from our external funds or mandates, and therefore the only decision left to us is the currency decision,” she said. Currency risk is hedged.Bergring also pointed out the difficulty in analysing the long-term value of UK assets before Brexit has actually happened.“It will totally depend on whether they aim for a hard Brexit or choose a more constructive alternative,” she said.Like her peers, Bergring said a hard Brexit would be very negative for investments, as a result of its effect on the broader economy.Veritas’ asset allocation (%)Chart MakerApteekkien Eläkekassa, the €622m pension fund for privately-owned pharmacies and oldest pension fund in Finland, invests roughly 2% in equity and private equity funds in the UK.CEO Hannu Hokka said the portfolio was neutrally weighted in the UK compared to indices used. Since Brexit, the fund has not increased its allocation to the UK, but is not hedging currency risk.Hokka said political risk was always difficult to calculate and calibrate as to what it means, as opposed to market risk.“The current scenario requires patience and treading carefully,” he said.Hokka said he was waiting for a normalisation of the situation between the UK and EU, whatever that might mean. Longer-term uncertainty was generally not good news for investors, he added.“I still hope that the UK will remain in the European Union. That would be a true win-win for everybody. That is up to the island nation to decide, though,” he concluded.Apteekkien Eläkekassa asset allocation (%)Chart MakerThe UK parliament will vote next month on how to proceed with the Brexit process, with multiple reports suggesting that a postponement of the current 29 March deadline is likely.Meanwhile, UK, EU and US regulators have been making arrangements to ensure that financial services – in particular the multi-trillion-dollar derivatives industry – can continue to operate regardless of the outcome. As the deadline for the UK exiting the EU gets closer, IPE spoke to leading investors in Sweden and Finland to find out how they were approaching UK and sterling-denominated assets.The majority of pension funds in Finland and Sweden do not take specific country views, with UK assets instead forming part of broader European or global portfolios.SPK, the SEK27bn (€2.5bn) pension fund for savings institutions in Sweden, has approximately 1% invested in sterling assets, according to CIO Stefan Ros. The assets are invested in equities and infrastructure, and the currency is hedged.“Since the [EU membership] referendum in 2016 we have increased our foreign exchange hedging of sterling,” he added. So far, however, Ros said that SPK had not excluded future investments in the UK.When asked about their views on the long-term value of UK assets over the next 5-10 years, most investors referred to the difficulty in assessing political risk, as well as the drawn-out process of establishing a deal between the UK and the EU.SPK’s strategic asset allocation (%)Chart MakerVeritas, the €3.1bn Finnish pension insurer, invests approximately 3% of its total assets in the UK.last_img read more

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