APK is one of Austria’s largest pension funds with roughly (E1.5bn) is assets under management. The beginning of the year 2000 marked the turning point in the thinking of many institutional investors. Therefore, as a result of the events in 2000, APK reviewed its investment decision-making process and developed an approach for a continuing sideways/declining market.
This strategy reflected the fund’s belief that the value-added potential of strategic and tactical investment control required reappraisal, particularly during falling markets. The new system was implemented in 2001, with great success, using two newly created ‘investment and risk groups’ (VRGs). The fundamentals for the APK model are the quarterly updated income and risk expectations for the most significant classes of assets.
Taking into account variable provisions already available, the fund calculates the risk capability of each individual VRG at the beginning of each year, using this as the maximum acceptable investment loss. On the basis of this income target, an individual income path is calculated in advance and continual monitoring takes place to ensure that it moves within prescribed limits. If a class of asset falls below the lower performance limit, loss limitation measures already defined in advance will be implemented by APK. If the performance is above plan, income protection measures can be applied.
The specific advantages of various financial instruments are used in the implementation of these measures and this takes place by movements on the spot market, portfolio insurance or derivative instruments.
The fund’s ‘dynamic control’ approach mainly pursues an ‘absolute return’ stance in the sense of loss avoidance/limitation in safeguarding earnings opportunities and is less interested in performance relative to the benchmark. It is characterised by short reaction times and aims to limit losses and make optimum use of short-term profit opportunities. As a result it can sometimes lead to significant deviation of the short-term, tactical allocation from the long-term strategic allocation. The optimisation of investment instruments, the (short-term) tactical allocation and an optimum risk overlay, which covers all sources of risk that can be safeguarded against, particularly currency risks and price risks for shares and bonds, are the main components of active dynamic control. The risks are actively managed by APK and external fund managers working closely together.
Strategic decisions are made quarterly and projected forward for 12 months. Tactical decisions take place at more frequent intervals and with a shorter projection period (normally monthly adjustment, monthly forecast). The risk overlay is generally tactically motivated, and implementation takes place in line with the market and is optimised on a daily basis.
In 2001, APK translated theory into practice with the launch of the two new VRGs. As a result of the structure of liabilities, the strategic portion of shares was established at 40% with a tactical range of 0% to 50%.
The fund’s earnings expectation model for 2001 forecast only slight growth for shares and the scheme envisaged that there would be greater price opportunities for bonds as a result of the environment of interest rate reductions. The risk capability of the two VRGs was set at 5% and the performance target was 6%, which meant that a variable provision could be created after just the first year.
As a consequence, APK invested the funds primarily in bonds at the beginning of 2001. A moderate cash reserve was also maintained to facilitate the purchase of ‘favourable’ shares in extreme market situations. As share prices repeatedly declined more heavily than expected, only a very small portion was actually invested in shares.
When in November bond prices shot up within a short period of time, APK decided to dispose of the majority of the bonds at high prices and to invest the VRG assets at money market rates until the end of the year. At this time, the performance of the VRG had already gone beyond the projected growth path and, without taking further risks, total earnings of 7% were already definitely achievable for the year 2001.
This short-term, active process was a result of maintaining performance and reducing risk, based on an allocation model with three classes of asset.

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