There is currently a mismatch between off-the-shelf benchmarks for credit portfolios and the actual duration required by a long-term investor like an Austrian Pensionskasse in fixed-income portfolios, according to experts.

On average the standard benchmark duration is at least five years, but investors need shorter duration to reduce their portfolios’ sensitivity to interest rates. The European Central Bank (ECB) is expected to begin raising interest rates next year, after it finishes tapering bond purchases later in 2018.

“The duration of the fixed income benchmarks currently does not match the market environment,” Günther Schiendl, CIO at the €6.9bn VBV Pensionskasse, told IPE. 

“We are absolute return investors as we have to achieve around 6% annually to match our liabilities target return.

“Sticking to a benchmark mostly only makes the regulator feel better or the board which thinks this is the safer investment decision.”

Gerald Moritz, founder and managing director of Moritz Consulting, agreed that benchmark duration was “too high”.

The consultant warned: “I am not sure all Pensionskassen are fully aware of the risks in their fixed-income portfolios – and most of their members certainly do not fully understand these risks.”

Moritz emphasised the continued importance of diversification “especially in credit risk management and duration”.

“One problem will certainly arise from the ECB trying to put bought bonds back onto the market,” Moritz added.

He noted that “in 2017, most pension funds were highly active in their asset allocation” and also in managing credit risks.

“Sticking to a benchmark mostly only makes the regulator feel better or the board which thinks this is the safer investment decision.” 

Günther Schiendl, VBV

At the €6.8bn Valida Pension, Austria’s second largest Pensionskasse, head of asset management Arnd Münker said he expected the ECB to prepare for the first interest rate increase in 2019 and “stop buying bonds in September 2018”.

“We already significantly reduced the risk from a change in interest rates in our portfolio by lowering exposure to euro government bonds and increasing the share of emerging market bonds,” said Münker.

At the VBV, diversification into emerging market local currency debt brought the average overall duration in the fixed income/credit segment to around three years.

“For the euro and the dollar interest rate sensitivity in that part of the portfolio, we have taken duration down to almost zero,” Schiendl added.

For Schiendl products like risk-parity funds “only offer false security” as they can suffer extreme losses in some market phases – like the 10% drawdown in February.

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