Luxembourg reserve fund gains 3.9% as EM managers underperform

Luxembourg’s €16.5bn reserve fund returned 3.9% on its investments in 2017, a year in which it confirmed a new investment strategy and renewed a host of mandates.

The Fonds de Compensation’s (FDC) investment vehicle underperformed its benchmark by four basis points.

The board of directors said this slight underperformance was mainly due to stock selection by its equity managers, which could not be offset by the positive effects of FDC’s tactical allocation.

Emerging market equities recorded their best performance since 2010 last year, the fund noted, with its benchmark returning 20.6%. FDC’s three managers “nonetheless” underperformed this by 3 percentage points, leading the reserve fund to terminate the mandate of one of these managers at the end of the year.

Overall, FDC’s equity investments gained 8.8% in 2017, to which global equities contributed 7.2% and small caps 9.9%.

Its bond investments returned 0.9%, real estate 0.7%, and money market funds 0.2%.

Investment strategy review

Last year the reserve fund revised its investment strategy for the third time since 2007, and renewed a number of asset management mandates.

Its new strategy has a higher allocation to risk assets, raising the equity quota from 32.5% to 40% of the portfolio, at the expense of bonds and money market funds.  

This pushed up its risk budget, but this was still below the 20% limit set by the investment strategy, according to the 2017 report for FDC’s mutual fund.

The reserve fund did not consider additional asset classes as part of its strategy review, but said it was considering allocations to private equity and private debt.

In addition, FDC indicated that it would place more emphasis on sustainability criteria in its decision-making processes. This included an aim to only award investment mandates to managers that considered sustainability matters in addition to carrying out financial analysis.

As previously reported, the fund plans to allocate to equity and bond investments intended to have a positive social or environmental impact, based on the UN Sustainable Development Goals.

FDC was required to renew several mandates by law last year as they had been in place for 10 years. Four bond mandates were awarded: three for euro-denominated bonds to HSBC Global Asset Management, Amundi Asset Management and Allianz Global Investors, and a global bond mandate to AXA Investment Managers. Axa IM also secured the sole money market mandate that FDC renewed.

Two mandates for indexed global equity management went to State Street Global Advisors and UBS Asset Management.