Occupational pension funds in Portugal made an average 1.8% investment return for the 2016 calendar year, down from 3.3% for 2015, according to Willis Towers Watson (WTW).

The figures brought average annualised returns for the three years to 31 December 2016 to 4.3%, and for the five years to that date, to 5.8%.

Gaudêncio Guedes, an investment consultant at WTW, said: “From the general performance indices, we would have expected around a 4% return overall – excluding real estate – for 2016, if we consider the actual asset allocation of the closed pension funds.

“However, the first quarter of 2016 was a tough one for financial markets and it may well have triggered a number of difficult decisions by managers regarding the investment strategies to be adopted that set the path for the rest of the year.”

Performance figures were submitted by so-called ‘closed’ funds, which are generally pension plans for a single employer or group of companies, and which make up the vast bulk of occupational plans.

The WTW universe covers around €13bn in assets, which is 80% of the closed pension fund market in Portugal. It incorporates more than 100 pension funds within the figures to end-December 2016, including the five biggest pension fund managers in Portugal.

The figures are based on median performance over each timeframe.

The final quarter of the year had produced returns which – at 0.6% – dipped below the previous quarter’s, of 1.4%.

Guedes said: “The Portuguese pension fund market has a euro bond exposure of roughly 60%. The fourth quarter was poor for euro bonds in general, and slightly worse for eurozone government aggregate bonds. Another factor in these low returns was probably the high exposure to direct real estate and liquidity, giving a significant ‘cash drag’ effect.”

He also highlighted the bias normally found in using local asset managers for local assets: “It’s probably worth noting that the PSI 20 [the top 20 stocks on the Lisbon Stock Exchange] had a painful performance, losing 12% over 2016.”

According to regulator ASF, debt was still the single biggest asset in Portuguese pension fund portfolios, with 49% invested directly in the asset class as at end-December 2016. Of this, 31% was in public and 18% in private debt.

Direct equity holdings were 8% of portfolios, while direct real estate made up 8%. A further 7% was in cash.

In addition, investment funds formed 29% of portfolios, but the split between asset classes was not published.

However, estimates from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP) broke down the investment fund figures to give an overall asset allocation of 57% in debt, 21% in equities and 13% in real estate.

The APFIPP sample covered 87% of the Portuguese pension fund market.

Guedes said: “The star of 2016 was definitely the US stock market, mostly due to the ‘Trump effect’ which pushed stock prices through the roof during the fourth quarter of 2016. Given the relatively conservative allocation of the closed pension funds market, the gains arising from the strong performers for 2016 (US, China and oil-driven commodities), were somewhat limited in Portuguese portfolios.”

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