Inarcassa is the e2bn pensions and social assistance fund for Italy’s self-employed engineers and architects and has approximately 100,000 members. The fund’s asset allocation strategy is designed to take into account hypothetical situations looking at the long-term risk/return balance and all potential investments. It must also consider risk tolerance, return objectives and time horizons.
The long-term assumptions regarding the balance between risk and returns for equity investments is consistent with Sharpe, Lintener and Moss capital asset pricing models (CAPMs) and Merton’s successive extensions. For fixed income, the fund uses a valuation method based on straightforward returns from the expiry of bonds in line with the duration of the bond index. Markowitz’s portfolio theory is observed and the hypotheses are contained therein.
The fund adopts and follows a risk aversion policy and as such has carried out a study to determine how sensitive its results are to the risk tolerance policy.
The return objective for the fund was initially set at a level of 3.5% net of inflation (based on a 2.5% inflation assumption) and net of tax (assumed to be 12.5% for non-property and 36% for property plus the 0.6% Italian ICI property tax rate). The return objective, and consequently the fund’s asset allocation policy, is reviewed every three years in line with its actuarial review.
Inarcassa is an investor with an ‘infinite’ time horizon policy, and to ensure this is achieved, it has set itself an investment horizon of three to five years with relevant assessments of returns, volatility and correlation taken over a five- to 100-year period relative to risk.
Inarcassa also imposes a number of limitations on its asset allocation strategy. No asset class may have a negative component or financial leverage greater than one. Alternative investments are limited to 14% of the fund’s total assets. Euro government and corporate bonds are limited to 16% or less for each class. Cash investments are limited to a maximum 2% so that that current costs are covered. Equity investments are limited according to location and local market capitalisation. Real estate retains the original weighting set when the strategy was established. One restriction recently introduced is that no asset class shall see its investment reduced to 0%.
The tactical asset allocation is implemented on the basis of the strategic asset allocation but aims to achieve higher returns relative to the benchmark. Its composition is influenced by changes in market conditions and the fund’s annual fund flows.
The asset management philosophy is substantially multi-manager/multi-strategy. Inarcassa uses a mix of active, passive or total return investment styles depending on the asset class. No one portfolio section employs more than one style, however. The investment approach is predominantly top-down whilst sector allocation takes precedence over individual stock allocation where value analysis studies are undertaken.
The core investment manager is in-house and looks after European equity and bonds and Italian-based real estate investments, whilst the external satellite managers manage US and Japanese equities and their respective corporate bond markets.
Alternative investments comprise hedge funds and private equity which are managed via single funds or funds-of-funds whilst alternative fixed income investments are selected on the basis of being directly linked to inflation or forward rate volatility. There are also investments in structured notes that are benchmarked against credit performance, exchange rates and equity baskets.
An external consultant measures the portfolio’s risk. The resulting report should identify the primary risk factors which the fund’s assets are exposed to. The risk analysis may look at any one investment class in isolation or the portfolio as a whole and highlight the main areas of inefficiency within the portfolio and the best ways to correct them.
The external managers are subject to a performance review every three months and are analysed on alpha of Jensen; beta; market timing; volatility; tracking error; Sharpe ratio; information ratio; semi-deviation; correlation; down and up correlation; downside deviation; ’Sortino’ index; and asymmetric coefficient (skew).
Each manager is rated according to a ‘valuation report’, following which they may be invited to come discuss the results and any eventual measures they can take to correct any errors in their management performance.

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