The move to Euroland and the internationalisation of its investment strategies have being the main focuses for Irish fund Electricity Supply Board (ESB) pension scheme.
During the past few years the fund, which has assets of E2.6bn, has undertaken significant changes in terms of asset management strategy.
Starting in 1994, ESB began its move from using balanced or partly specialist mandates to a specialist investment management structure involving both passive and active managers. The asset allocation has been decided after taking into account sophisticated asset liability studies. The concept of indexed management for some asset classes has been supplemented for active managers.
The portfolio split of the fund is decided by the board of trustees using professional advise and looking at the main categories of global equities, bonds, property and alternatives.
Before the advent of the euro, the fund had a strong bias towards Irish equities, and it was clear among the trustees that changes to this approach were urgently needed. In order to do this, it was decided that in the long term Euro-zone assets were to constitute the new domestic market. So in 1998 the fund started reducing its exposure to Irish equities. The process was carefully monitored in-house with the aim to achieve reasonable value during the sale period, and the fund set up a Euro-zone index portfolio based on the STOXX index.
The transition from individual Irish equities to Euro- zone, medium-sized companies was made on a stock by stock basis, only selling when predefined target prices could be achieved, and always focusing on the construction of a balanced and diversified portfolio investing across Euroland.
The aim of the whole process was successfully achieved, and once finalised the transition the fund ended up with was an equity portfolio that could offer a lower risk and a greater diversification than its previous Irish-biased strategy.
As a consequence of the reduction of the fund’s exposure to Irish equities, the global equities proportion is now carried out by allocation to global equities, excluding the Euro-zone and to Euro-zone equities. A proportion of the global account is hedged back into the euro. This enables a greater exposure to global stocks to enhance returns, but still allows the fund to control risk.
Recently, the concept of using an indexed core has been gradually changing to an active approach to investment concentrating on medium-sized companies in Euroland, whereas indexation has been used to gain exposure to large corporations.
On the global equities side, the fund uses four active and one passive managers. These were selected with the aim to provide added value with a reasonable level of diversification and following a more cautious value bias approach to equity investment.
For that part of the portfolio investing in fixed income instruments, the fund uses two active managers investing on government and corporate bonds respectively and both concentrated on euro-denominated issues or hedged back into euros.
The fund approaches property investment both directly and through investment fund vehicles. In the Irish domestic market, the fund invests directly in real estate holdings across the country. This same approach is followed by investments in UK property. In the rest of Europe, however, the fund uses investment funds to gain exposure to the real estate matket.
As part of its strategy to achieve diversification and in line with that done by other funds with a similar level of sophistication, the ESB pension scheme has also introduced alternative investments as another asset class in their investment portfolio. With this in mind, the fund has exposure to private equity funds as well as direct involvement in sectors such as hotels and utilities. Also, following the trend among other institutional investors in the country, the fund is looking at investment in Irish forestry – seeking further portfolio diversification and long-term appreciation. Exposure to these alternative asset classes is monitored and assessed in-house.
Taking into account this broad and complex investment structure, ESB also found the need for modification on security services. The implementation of a specialist managers’ structure meant it was necessary to establish an administratively smooth framework that could enable up-to-date assessments of the fund’s overall position. Therefore, the scheme is now working with a single global custodian for all the directly held assets with online links for financial analysis.
The changes taking place within the ESB pension scheme investment philosophy have been many and very significant ones. Firstly, they have successfully completed the transition to the euro. Secondly, this is at the same time as implementing a more active and international approach with some exposure to alternative asset classes. This shows the fund’s capability to smoothly adapt to different market conditions and its commitment to develop and improve its investment structure.

Topics