Germany's BVK to increase external management

GERMANY - BVK, the €45bn collective retirement vehicle for over 1.5 million self-employed people and employees in Bavaria, will be fine-tuning each one of its 12 portfolios as part of changes to its strategic asset allocation (SAA), and increasing external management.

The majority of fixed-income and domestic real estate assets are currently managed in-house, but the fund wants to award more mandates to external managers in the future, in a bid to increase diversification within existing portfolios and strengthen a core/satellite strategy.

"[Holding] 80% fixed-income is too much in the long-term", argued Lothar Panzer, chairman of the board at the BVK.

The BVK decided, with assistance from its consultants Mercer, to check the risk tolerance of each of the so-called "Versorgungswerke" for different professions including judges, apothecaries, lawyers and notaries, as part of its 2009 bi-annual SAA review.

"We will be fine-tuning the asset allocation of each of the portfolios, which means in some cases we found we can increase risks, while in other portfolios we will have to reduce it," said Daniel Just, chief investment officer at BVK.

Changes to German investment regulations have allowed the scheme to create master funds for each Versorgungswerk, and these in turn are now allowed to invest in fund of funds which will - among other things - make selection easier for each portfolio.

The fund also focused on liquidity as part of the review, as liquidity "had not been considered much of an issue before" the recent credit crisis, admitted Just.

Liquidity had never been much of an issue in daily operations because of a good contributions/pay-out ratio. But the BVK has realised its importance in the optimising of risk positioning during difficult market situations.

The BVK has introduced a "liquidity check" for each portfolio which stress-tests each asset allocation on that particular factor.

The BVK and Mercer have also developed a two-scenario SAA to deal with future crises: the "normal world" and the "world in crisis" - or a "regime switching" strategy , as Just describes it.

Depending on the fund's view of the financial markets, one or other of the SAA will be put in place and should see the asset allocation shift to create a more stable portfolio but with similar return expectations.

When asked whether the BVK still sees the current financial environment as the "world in crisis", Just pointed out that "it takes time to get out of a crisis".

The fund will gradually build up its target 1% exposure to timber and 2% to infrastructure in 2010, as well as fund a second private equity portfolio. (See earlier IPE article: Germany's largest fund to award first timber mandate)

It will maintain its current 5% hedge fund exposure via fund of funds while commodities long/short exposure "will be built further, according to Just.

The BVK also plans to reduce European equities and hold emerging markets and SME stocks, while on the fixed income side the fund favours emerging market debt, high-yield and corporates.