Ateb 2011 Greenwich Speech V F2

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Keynote speech for the belgian Association of Corporate Treasurers. ......Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are
quite dislocated from their policy targets. European credit and active equities are well below target and passive
equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target
allocations.....

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Ateb 2011 Greenwich Speech V F2

  1. 1. Pension Plans: Challenges and ResponsesContinental European Investment Management 201129 September 20111CONFIDENTIAL
  2. 2. Summary of Key Findings ▪ Continental European institutions reported rising asset levels on the back of the rebound in equities; however they stand well below 2007/8 levels and recent events in global markets and substantial falls in key risk assets will have been detractive to most portfolios. ▪ In the broad market, international equity allocations have risen on the back of positive markets and now almost match allocations to domestic equities, which have contracted. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. A minority of institutions anticipate making significant asset allocation changes. The weight of responses indicate reductions in European government bonds and increases in private equity. ▪ The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income. Both equity and fixed income external allocations are focused on European product except in the case of pension funds, where international equities is dominant. ▪ Defined benefit pension fund asset allocations are quite dislocated from their policy targets. The sovereign debt crisis has driven a tactical rotation out of passive European government bonds into active product and international bonds; Meantime, European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations. ▪ Large funds have expanded the number of external managers used, diversifying away manager-specific risk and hiring more specialist firms. In aggregate, however, both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low characterized by little product focus. ▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment. ▪ Investment consultant usage has fallen again. 2 CONFIDENTIAL
  3. 3. Key issues facing institutional investors ▪ Achieving the target rate-of-return is cited as the number one concern by many Representative Quotes institutional investors •“Capital markets will not generate the fund return demanded within reasonable risk limits.” –German Corporate Pension ▪ Other key issues include: Fund •“We need 3.5% performance every year which is a challenge — Sovereign debt crisis as long as Swiss bonds return only 2%.” –Swiss Insurance Company — Risk of inflation •“Issuer risk [is driving us] away from high-risk Euro-Govies.” –German Endowment/Foundation — Interest rate increases •“The Euro debt crisis is currently our major concern.” – Belgian Insurance Company — U.S. deficit •“[We are] very worried about an interest rate increase.” – Belgian Corporate Pension Fund — Japan disaster •“We want to get out of interest rate guarantees [ ] I am — Arabian political turmoil deeply worried about high interest rates.” Danish Corporate Pension Fund •There are major political issues to worry about, the U.S. deficit, the Japan disaster, the Arab dictator states etc.” – Swedish Corporate Pension FundSource: Greenwich Associates 2011, CEIMF-11 3 CONFIDENTIAL
  4. 4. Key issues facing institutional investors ▪ Regulatory developments are causing Representative Quotes additional stresses across the region: • “Increased regulation coming from the central bank [is] putting pressure on smaller pension funds and making their life difficult to — Regulations impacting Dutch pension impossible” –Dutch Corporate Pension Fund funds are widely seen as overly • “[We are experiencing] undue and irresponsible big pressure restrictive and not in member’s best from the 2 regulators on pension funds.” – Dutch Corporate interests Pension Fund • “We have to become so transparent that we have to inform the — Solvency II implementation regulator beforehand what investments we intend to make. This is not in the interest of our clients at all.” –Dutch Corporate Pension Fund — Basel III and liquidity requirements • “The restricting regulations imposed on the pension funds created by the state to contribute to the Swedish general pension system limits the placement possibilities and thereby makes it difficult to obtain a satisfactory rate of return.” – Swedish Corporate Pension Fund • “Solvency II regulations and at the same time, the bank regulation Basel III, keeps me up at night.” –Danish Bank • Basel III regulations and its consequences [are leading to] tighter liquidity, forced equity increases and more difficult refinancing.” – German Insurance Company • “It is unclear at this time what the impact of Basel III will be on the capital requirements of the bank which could affect substantially our Depot A.” –German BankSource: Greenwich Associates 2011, CEIMF-11 4 CONFIDENTIAL
  5. 5. Asset allocation trends ▪ A significant number of institutional investors are contemplating more active Representative Quotes management of their assets in order to selectively avoid exposure to perceived • “ [We are becoming] more active and less passive because of the PIIGS problems.” –Norwegian Endowment/Foundation risk areas. • “[We are] shifting the government bonds portfolio to low-risk- government bonds.” –German Corporate Pension Fund ▪ Investors are diversifying out of government bonds. • “Shift from government bonds to inflation linked corporate bonds.” –German Corporate Pension Fund ▪ While positioning portfolios to benefit • “There is too much enthusiasm for emerging markets, so we are liquidating Asia and moving into Global Emerging Markets from the shifting economic balance including Eastern Europe and Latin America.” –Dutch Insurance between emerging and developed Company markets, there is growing concern of a • “We are increasing our investments in Emerging Markets such as bubble forming. BRIC, but nothing in Africa.” – Swedish Corporate Pension Fund • “Alternatives are potentially interesting but there is still lack of ▪ Transparency remains a major hurdle to transparency and liquidity in some products.” –Swiss investing in alternatives. Endowment/Foundation • “We are short duration, and now contemplating doing a swap or ▪ Use of derivatives for risk management buying put options or even inflation linked bonds.” –Swiss Corporate Pension Fund purposes is growing.Source: Greenwich Associates 2011, CEIMF-11 5 CONFIDENTIAL
  6. 6. Institutional assets levels are recovering, but still fall well short of 2007highs C.E. Institutional Investors’ Total Institutional Assets 2001 – 2011, by Type of Institution (excluding Banks and Savings Banks) € 3,000 € 2,454 € 2,500 € 2,305 € 2,035 € 1,978 € 2,000 € 1,885 € 1,161 € 1,699 € 1,655 Euros (billions) € 1,489 € 1,484 € 1,258 € 939 € 890 € 1,500 € 778 € 1,281 € 1,214 € 882 € 763 € 658 € 736 € 1,000 € 505 € 575 € 100 € 750 € 549 € 653 € 631 € 491 € 500 € 371 € 417 € 490 € 483 € 493 € 449 € 412 € 434 € 467 € 360 € 330 € 309 € 334 € 192 € 195 € 143 € 217 €0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Corporate Pension Public Pension Corporate Treasury Foundations InsuranceSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and definedcontribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Banks and Savings Banks not shown astrend impacted by change in question methodology. 6 CONFIDENTIAL
  7. 7. While fixed income continues to dominate, international equity allocationshave grown on the back of positive markets and now almost matchEuropean equity allocations which have contracted C.E. Institutional Investors Asset Allocation 2011 Allocations to Alternatives have reduced since 2009 from a low 100% 5.0% base 3.3% 90% 6.6% Real Estate has increased by 7% 6.1% 80% Proportion of Total C.E. Assets 70% Cash allocations are little changed 60% 50% 60.6% Fixed income is broadly stable, 40% growing by about 3% since 2009 30% International Equity allocations 20% have more than doubled since 9.6% 2009 10% European Equity has reduced 10.7% by15% since 2009 0% 2011 European equities International equities Fixed income Cash Real Estate Alternatives OtherSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assetstogether with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. 7 CONFIDENTIAL
  8. 8. A minority of institutions anticipate making significant changes to theiroverall asset allocation in the next 3 years; weight of responses indicatereductions in European government bonds and increases in private equity C.E. Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation Significantly Decrease Significantly Increase No Change 179 European Credit Bonds – Active 28 33 International Equities – Active 26 31 147 European Equities – Active 31 29 173 Real Estate 16 28 156 European Government Bonds – Active 48 24 176 Private Equity 2 22 137 International Bonds – Active 14 19 138 Commodities or Natural Resources 1 14 110 Hedge Funds 10 12 144 European Government Bonds – Passive 15 12 129 Cash and Short-Term Investments 28 11 133 European Credit Bonds – Passive 14 10 150 European Equities – Passive 13 9 146 Infrastructure 1 8 105 International Bonds – Passive 2 8 128 International Equities – Passive 5 6 134 Other 4 4 45 European Bonds – Passive 2 4 145 60 50 40 30 20 10 0 10 20 30 40 50 60 Number of C.E. InvestorsSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Three year outlook.Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. 8 CONFIDENTIAL
  9. 9. Anticipated change levels in Belgium Belgian Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation Significantly Decrease Significantly Increase No Change 3 17 European Credit Bonds – Active 1 3 10 International Equities – Active 5 5 14 European Equities – Active 3 6 13 Real Estate 4 European Government Bonds – Active 3 13 5 11 Private Equity 0 1 International Bonds – Active 1 10 1 Commodities or Natural Resources 0 0 8 Hedge Funds 0 0 8 European Government Bonds – Passive 5 1 10 Cash and Short-Term Investments 5 0 10 European Credit Bonds – Passive 1 0 9 European Equities – Passive 3 1 11 Infrastructure 0 1 7 International Bonds – Passive 0 2 8 International Equities – Passive 1 0 8 Other 0 0 4 European Bonds – Passive 0 0 10 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Number of Belgian InvestorsSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Three year outlook.Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. 9 CONFIDENTIAL
  10. 10. The trend towards the use of external managers is gathering pace;Belgian and Norwegian Schemes are least likely to go external C.E. Institutional Investors’ Assets Managed Internally versus Externally – C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by Matched Sample Country Proportion of Total C.E. Assets 10.3% 30.6% 9.5% 27.7% 25.9% 25.0% 49.4% 7.9% 25.8% 26.5% 12.7% 34.1% 41.7% 80.2% 64.3% 61.4% 67.0% Proportion of Total C.E. Assets 49.7% 10.3% 11.5% 30.6% 18.0% Austria Belgium Denmark Finland France Germany 63.9% 62.0% C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by Country 47.9% Proportion of Total C.E. Assets 8.6% 10.9% 21.6% 23.3% 22.2% 42.9% 43.0% 17.8% 33.3% 29.3% 6.6% 25.3% 2009 2010 2011 69.2% 71.3% 50.5% 45.1% 47.4% 31.7% Discretionary Mandate Pooled or Commingled Funds Iberia Italy Netherlands Norway Sweden Switzerland Internally ManagedSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and definedcontribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Question methodology was changed in2011 in order to raise the accuracy of responses. 10 CONFIDENTIAL
  11. 11. Asset mix of total DB pension assets and externally managed assets; ahigher proportion of equities than fixed income is externalized C.E. Institutional Investors Defined Benefit Plan Asset Allocation 2011 – Total Mix versus External Mix, by Type of Institution 100% 2.9% 5.0% 4.5% 4.2% 5.5% 3.8% 6.1% 4.6% 5.2% 90% 7.3% 14.9% 8.9% 7.5% Total Externally Managed C.E. DB Plan Assets 11.1% 24.4% Proportion of Total C.E. DB Plan Assets or 80% 13.1% 70% 60% 27.9% 42.3% 53.7% 45.6% 54.6% 37.8% 50% 40% 30% 33.6% 22.4% 18.9% 11.2% 13.7% 25.6% 20% 10% 13.3% 15.2% 15.3% 11.6% 8.5% 10.7% 0% Pension Funds - Pension Funds - Corporate Pensions - Corporate Pensions - Public Pensions - Public Pensions - Total Mix External Mix Total Mix External Mix Total Mix External Mix European equities International equities Fixed income Cash Real Estate Alternatives OtherSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.Question methodology was changed in 2011 in order to raise the accuracy of responses. 11 CONFIDENTIAL
  12. 12. Corporate DB plans’ anticipated asset returns fall short of mean actuarialearnings rates by 20 basis points C.E. Corporate Defined Benefit Plans’ Average Actuarial Earnings Return on PlanC.E. Corporate Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets Assets 9.1% 8.9% Current 7.5% Actuarial Earnings Rate of Return 7.1% actuarial Expected Total Rate of Return 6.9% earnings 6.7% 6.4% rate 6.2% 5.7%5.7% 5.4% 5.5% 5.5% GAP = -0.2% 3.9% 4.0% Actual expected rate of plan return European International Fixed income Real Estate Private Hedge Fund 2009 2010 2011 equities equities Equity 2010 2011Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research. Note: Mean calculation excludes reported answers of "0" and / orNote: Mean calculation excludes reported answers of "0" and / or "None". "None". 12 CONFIDENTIAL
  13. 13. Public DB plans’ anticipated asset returns exceed actuarial rates by 50basis points C.E. Public Defined Benefit Plans’ Average C.E. Public Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets Actuarial Earnings Return on Plan Assets 9.7%10.0% Actual Actuarial Earnings Rate of Return 7.3% expected 7.1% 7.1% Expected Total Rate of Return 6.8% 6.8% rate of plan 6.6% return 6.4% 5.8% 5.1% 5.2% GAP = 0.5% 4.8% 3.8% 3.9% Current actuarial earnings rate European International Fixed income Real Estate Private Hedge Fund 2009 2010 2011 equities equities Equity 2010 2011Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research. Note: Mean calculation excludes reported answers of "0" and / orNote: Mean calculation excludes reported answers of "0" and / or "None". "None". 13 CONFIDENTIAL
  14. 14. DB pension funds will need to unwind passive equity allocations andincrease active equity allocations to reach policy targets Difference Between C.E. Pension Investors Defined Benefit Plan Asset Allocation and Target Defined Benefit Plan Asset Allocation 2011 Intl. Equities – Passive 9.7% European Govt. Bonds – Active 5.2% Intl. Bonds – Active 3.7% Alternatives 3.5% Currently Overweight Real Estate 2.9% Other 1.7% European Equities – Passive 1.2% Intl. Bonds – Passive 0.2% Cash -1.2% European Bonds – Passive -2.3% Intl. Equities – Active -3.6% European Credit Bonds – Passive Currently Underweight -4.4% European Credit Bonds – Active -5.4% European Govt. Bonds – Passive -5.4% European Equities – Active -5.9% -15% -10% -5% 0% 5% 10% 15% Current Allocation Less Target AllocationSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets. 14 CONFIDENTIAL
  15. 15. In line with the lower proportion of assets managed externally Belgianschemes on average use fewer managers than seen in most markets C.E. Institutional Investors Average Number of Investment Managers Used, by Country 2011 12 10.6 10.4 10 8.6 8.7 8.7 8.2 Number of Investment Managers 7.8 8 6.6 6.3 6.1 6 4 2 0 Total Austria Belgium France Germany Iberia Italy Netherlands Nordics Switzerland InstitutionsSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research. 15 CONFIDENTIAL
  16. 16. Belgian investors’ use of investment consultants is in line with thecorporate and public pension fund averages in Europe. Belgian Institutional Investors Using C.E. Institutional Investors Using and Expecting to Hire Investment Consultants for Investment Consultants for Advice on Advice on Investment Matters 2011, by Type of Institution Investment Matters 60% 60% 50% 50% 50% 13% 5% 43% Proportion of Belgian Investors 5% Proportion of C.E. Investors 40% 40% 4% 31% 31% 30% 30% 1% 4% 42% 40% 40% 20% 20% 33% 3% 10% 20% 20% 10% 15% 0% 0% European Corporate Public Corporate Insurance Banks Savings 2008 2009 2010 2011 Investors - Pensions Pensions Treasury Banks Total Now Use 2011 Expect to Hire 2011 Now Use 2011Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: “Now Use” refers to investments used by investors in the past 12 months. “Expect to Hire” refers to expected hiring for investments in the next 12 months. 16 CONFIDENTIAL
  17. 17. Average fees paid to external managers have slipped Average Fees Paid by C.E. Institutional Investors to External Managers 70 60.5 59.3 60 54.1 51.9 51.1 50 44.6 44.9 41.2 41.7 Basis Points 40 35.3 32.5 30.9 30 24.7 22.6 22.5 20 10 NA NA NA 0 All Outside Managers Active European equity Active international Active fixed income Multi-Asset Real estate equity 2009 2010 2011Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: Shown in basis points. Mean calculation excludes reported answers of "0" and / or "None". 17 CONFIDENTIAL
  18. 18. In Summary ▪ Each in their own way, DB pension plans continue to struggle with the challenge of closing funding gaps and generating returns required to meet future obligations. ▪ As a consequence, pension plan policies are shifting away from the strong de-risking seen in 2009-2010. International equity allocations have risen and now almost match allocations to domestic equities. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. Anticipated changes include reductions in European government bonds and increases in private equity. ▪ Similarly, pension schemes are more willing to see if outsiders can help generate alpha and diversification. The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income. ▪ Large funds have expanded the number of external managers used, however, on average both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low. ▪ Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are quite dislocated from their policy targets. European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations. ▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment. 18 CONFIDENTIAL
  19. 19. Methodology ▪ From February to May 2011, Greenwich Associates conducted personal interviews with 418 of 709 of the largest institutional funds in Continental Europe. ▪ These institutional investors comprise corporate and public pension funds, corporate treasuries, foundations, insurance companies, and banks with externally managed assets greater than €500 million. In some markets where the universe of large institutional investors is limited, we conducted supplemental interviews with institutions with between €250 million and €500 million in externally managed assets. ▪ Senior fund professionals were asked to provide quantitative and qualitative evaluations of their investment managers, qualitative assessments of those managers soliciting their business, and detailed information on important market trends. ▪ Overall, 59% of institutions targeted participated in our research. Of the 418 institutions interviewed, 96% allowed disclosure of participation and 75% allowed attribution of their individual responses. Research Coverage of C.E. Institutional Investors 2011, Research Coverage of C.E. Institutional Investors 2011, by Type of Fund by Country C.E. Institutions C.E. Institutions 201 Universe 111 102 Universe 171 85 83 82 Interview ed Interview ed 69 119 106 123 60 90 46 51 48 57 50 40 30 61 41 25 70 40 24 41 30 51 34 23 27 15 19 15 15 Savings Insurance Treasury Corporate Pension Banks Foundations Iberia Italy Switzerland France Sweden Finland Belgium Germany & Netherlands Denmark Norway Pension Banks Public Corp. AustriaSource: Greenwich Associates 2011, CEIMF-11, Top Tier Research.Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information. 19 CONFIDENTIAL
  20. 20. Contact Information UNITED STATES EUROPE ASIA 6 High Ridge Park 90 Basinghall Street 137 Amoy Street Stamford, CT 06905 London #03-05 Far East Square USA EC2V 5AY Singapore, 049965 Tel: +1 203 625 5038 United Kingdom Tel: +65 6236 0142 800 704 1027 Tel: +44 (0)203 418 8200 CANADA EMAIL JAPAN 14 Prince Arthur Avenue, Kagurazaka FN Building 9th Floor ContactUs@greenwich.com Suite 208 6-67 Kagurazaka, Shinjukuku Toronto, Ontario Tokyo 162-0825 or visit www.greenwich.com M5R 1A9 Japan Canada Tel: +81 3 3513 6667 Tel: +416 925 0197© 2011 Greenwich Associates, LLC. All rights reserved. No portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties orpublicly without the permission of Greenwich Associates, LLC. Greenwich Associates®, Competitive Challenges®, Greenwich Quality Index®, and Greenwich Reports® are registered marks of Greenwich Associates, LLC. Greenwich Associates may also have rights in certain other marks used in these materials. 20 CONFIDENTIAL

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