GERMANY - BVV, an €18.6bn pension fund for Germany's financial sector, says its return on assets fell to 5.1% in 2006 from 5.4% in 2005 as continued low bond yields
depressed its fixed income-laden portfolio.

Like other German Pensionskassen, or insurance-type schemes, BVV is heavily exposed to fixed income. The scheme's annual report for last year reflects that again, as it had well over 70% in bonds and bond funds.

Illustrating how the low yields affected its portfolio, BVV said: "Current yields on bonds remain at historic lows. The return for a 10-year German Bund is 3.95%, or under our minimum guarantee for paid-in savings."

BVV's guarantees a 4% return on the savings, which is above the 2.25% absolute minimum offered by other German Pensionskassen.

"In past years, we have done everything we can to compensate for the low bond yields. Indeed, our beneficiaries have gotten minimum returns that exceed those from other insurance-type products," the scheme said.

Yet despite a third straight year of positive equity markets, BVV said it kept equity exposure "virtually unchanged" at 11.8% in 2006. While Pensionskassen face tight investment restrictions, they may invest up to 35% of assets in equities.

Elsewhere in BVV's portfolio, the fund said it had further reduced direct holdings in German real estate to 0.8% of assets.

Its indirect exposure to real estate - via funds - totalled 3.8% of assets and BVV said properties were acquired by the funds in Europe as well as in the US and Canada.

"In 2007, the BVV will further diversify its real estate portfolio by, for example, looking at opportunities in the Asian-Pacific market," the scheme added.

The Berlin-based fund also reaffirmed as part of an overall diversification of its portfolio, it is planning further small investments in hedge funds, private equity and structured products.

IPE previously reported of the €1bn the scheme is to invest annually, 80% is earmarked for bonds - including structured products. The other 20% is to be allocated to other asset classes, including hedge funds and private equity.

Beyond the fact that BVV currently has €120m invested in hedge funds and plans to raise private equity exposure to 1.5% of assets "in the mid-term", no further specifics are known.

BVV now has 320,000 contributing members and just over 85,000 pensioners.