Fixed income and active equity pay off at Brazil’s FUNCEF

Switching out of equities into fixed income contributed to Brazil’s Fundação dos Economiários Federais, FUNCEF, healthy 2022 returns. According to it’s latest annual report, the $19.1 billion pension fund for Caixa bank employees returned 11.28 per cent in 2022 against a target return of 10.70 per cent and added $1.8 billion to the portfolio.

“The 2022 balance sheet points to the Foundation’s solidity in a period when pension funds dealt with a scenario of high inflation and large fluctuations in the Stock Exchange,” states the report.

FUNCEF, which was founded in 1977 and is Brazil’s third biggest pension fund with 140,000 participants, allocates to variable income (equity), fixed income and real estate investments.

Much of its 2022 results come from a successful allocation to fixed income. In the first quarter of the year, the pension fund took advantage of a window of opportunity to sell equity and buy fixed income assets with a beneficial spread, reducing the risk of the portfolio.

“Despite the challenging scenario, at a favourable moment in the first quarter of the year, FUNCEF took advantage of the appreciation of the Stock Exchange to make gains and migrate resources to fixed income which presented good opportunities in the wake of the current high interest rate cycle,” says the report.

FUNCEF also added short duration treasury bills (with a maturity of up to five years) as part of a liquidity strategy.

“The idea is to have the flexibility to take advantage of any drop in variable income to buy back selected assets with good appreciation potential,” says the report.

Active management

Throughout 2022, falls in the stock exchange created favourable windows for equity investment in certain sectors of the economy, continues the report. Seeking to capture these opportunities, FUNCEF reduced the position in its internally managed passive strategy which replicates the performance of the IBrX 100 and tracks Brazil’s 100 most traded securities.

FUNCEF increased its allocation to stock picking which rose from 22 per cent to 45 per cent of the total equity allocation.

“Based on analysis of the fundamentals of the companies, the strategy of management sought to select stocks with a return potential greater than the IBrX 100 in the medium and long term. In 2022, the excess gain reached 1.7 percentage points.”

The strategy also required a boosted internal team.

“The result is directly related to the investment in qualification and analysis capacity of the team which works to obtain consistent returns within the best practices from the market.”

Real estate

For the first time in two years, FUNCEF’s real estate allocation outperformed, returning 13.66 per cent and surpassing the Real Estate Funds Index-IFIX, Brazil’s  main national indicator of the sector, driven by the revaluation of assets and divestment. Divestment will continue in the coming year as FUNCEF plans for the sale of 94 assets by 2025, mainly land, commercial buildings and hotels.

The report cites a surplus at the pension fund for the third time in five years, and states that the pension fund paid a record amount of benefits ($1.1 billion.) FUNCEF reported higher returns than the average profitability of 120 Brazilian pension funds, according to a survey by consultancy Aditus.

FUNCEF manages three pension plans. The biggest, the Reg/Replan, is a defined benefit (DB) scheme. The bulk of the portfolio is invested domestically although taps international exposure via its allocation to Brazilian stocks like Vale, Petrobras and the world’s largest meat producer, JBS.

FUNCEF cites its key values as transparency, ethics, participatory management, equity, professionalism, commitment and sustainability. The focus of its activities is to guarantee benefit payments. FUNCEF was the first pension fund to adhere to Brazil’s Stewardship Code, bringing together a set of principles and governance recommendations for institutional investors.