European funds start rebalancing process

Pension funds in Europe are rebalancing their portfolios to reflect huge falls in equity markets as the financial crisis forces them to re-evaluate the relevance of their strategic asset allocation in the new market environment.

Dutch pension funds sold off 26 billion (US$33.8 billion) worth of securities in the fourth quarter of 2008, with the sale of debt certificates, such as bonds, accounting for 17 billion and equity sales representing 9 billion.

The Dutch regulator, De Nederlandsche Bank (DNB), said the sales, coupled with substantial losses on the funds’ equity holdings, caused the value of their equity and debt portfolios to fall by 86 billion during the quarter to 529 billion at year-end. This was a 19 per cent reduction when compared to the fourth quarter of 2007.

“Two-thirds of the equity sales concerned shares of US companies and financial institutions,” DNB said. European debt certificates also accounted for a large part of the sell-off.

Meanwhile, the NOK2275 billion (US$336.8 billion) Norwegian Government Pension Fund – Global – has made a number of changes to its investment strategy on the back of poor performance and diversification within the fixed income portfolio.

In its annual report, the fund noted it had reduced the number of fixed income mandates and is continuing to move towards its goal of increasing the strategic allocation to equities within the portfolio, from 40 to 60 per cent.

“The potential to achieve independence between positions in fixed income markets appears to be smaller than we previously assumed,” Global said.

“The number of fixed income mandates has therefore been reduced substantially.”

However, the fund added that it was unable to make major changes to the portfolio in the short term due to reduced liquidity in parts of the fixed income market.

“In the current situation, therefore, we are prepared to hold substantial holdings in the fixed income market to maturity,” Global said.

DNB noted two main drivers behind the sell-off by Dutch funds.

“With a view to spreading their risk and to realising long-term returns on investments, pension funds aim for a strategic mix of equities and bonds in their securities portfolios,” the regulator said.

“The substantial price losses on the stock exchange had reduced the relative size of funds’ equity holdings. In order to restore the balance – and to reduce the increased relative weight of their debt assets – bonds were sold off.”

Currency hedging through currency derivatives, which led to liquidity constraints around the settlement of contracts, also contributed to the sale of both shares and debt, DNB noted.