Christian Böhm, is CEO of the Austrian multi-employer fund APK. He recently revealed the 'secrets' behind his scheme's strong returns to Pension Funds Insider and what he thinks needs to be done in Europe to improve our chances of surviving the ongoing financial crisis

Pension Funds Insider (PFI): Last year APK outperformed the market – what is at the core of this good performance?

Christian Böhm (CB):We have good diversification. (Both with) the asset classes (and) the actual managers, so have been able to create the best possible (scenario). Our active approach ensured we were not always a victim of the very volatile markets; we were able to work with (the volatility).

PFI: You follow an extremely active investment strategy, not a common thing amongst pension schemes, what is your main motivator for this?

CB:There are different reasons.For example, we have had good experiences in the past, especially with equity portfolios. During the last couple of years we have seen that the world is changing a little bit and you have to address those changes with an active approach. To think in benchmark categories is a unconventional way of thinking for pension funds.

PFI: There's been a long-standing argument about passive vs active investment management, with studies showing that passive may save investors more money in the long-run, do you disagree with that?

CB: There absolutely is an ongoing debate about this issue. We have a different view on it, but our active structure does not mean we do not use passive instruments, we just apply them more actively. We do not see our active approach as a completely dogmatic position.

In different times different investment strategies have different advantages and disadvantages. If you look at the level of active management which we do on the basis of asset allocation, the reason we apply a more active strategy now is that we have an unprecedented amount of structural change going on around us. If you look at different asset classes at the moment you will see they are changing. Look for example at the relation between bonds and equities, their risk factors are different from ever before. You have to monitor this and make some active decisions.

This is also with regards to our risk management in general, some active decisions we made had the background of risk management deliberations. One of our philosophies is that if you have gained more than what you expected, (then) it is better to take these gains than to look if you can lose them somewhere else again.

PFI: Do you feel your fees are justified for their active equity mandates?

CB: We currently have an excellentinvestment team thatcarries outstrategic and tactical asset allocations and certain parts of the portfolio are managed internally.

The fees we have are fees we can accept, it is a bargaining process. We do monitor them closely and in the end we have to say if you pay higher fees you have to be rewarded, and that is what we have to ensure.

PFI: Last year you were lauded for 'anticipating new trends in financial markets'. How does that currently show in your portfolio?

CB: We lookat the future ofevery asset class. One of our good decisions early last year was the decision not to follow JP Morgan's EMU benchmark in our fixed income portfolio. This ensured that we already reduced our Euro fixed income exposure in 2010, ahead of many others.

You need to really think what you would like to invest in. Does it make sense? Will you benefit from it or is it just part of a certain benchmark? We look at equities in the same way, we made some active decisions and decided that we did not want to invest in certain industries at the moment. The next thing we want to invest in actively during 2011 is the whole alternative asset pocket. We are taking small steps but we have to make sure take we give our active managers more freedom in the portfolios regarding trackingerrors and so on.

Our size gives us the possibility to make interesting investments but we are not big enough to have a real impact on the market if we move. We can certainly try things out by making small investments on an experimental basis. Often we find ourselves to be the first investor in certain products but that is always after careful deliberation with our investment manager; it is the outcome of a long andintensive discussion. We need to ensure that a certain product's risk-return profile fits within our portfolio but we have no fears to be the first investor.

PFI: What are your views on ESG and RI matters when it comes to investments for the pension scheme?

CB: As a pension scheme we have a big responsibility when it comes to responsible investing so we agree on the general principles that these terms set out. On the other hand however, we see, especially in Austria, that those companies which could be viewed as our competitors, solely use ESG as a marketing tool for customers. We choose not to do that but still do a lot behind the scenes. There is no need to brag about it, just do it.

For example, we have systems in place to monitor all our portfolios, this gives us access to good external reports and databases. On the basis of these we can internally decide which companies might be conflicting with our ESG requirements and start a dialogue with them. We first try to undertake an active approach in the communication and see if we can get the company to adjust to our standards. Basically we use our position as a large investor to influence. If they can't or won't solve matters to our satisfaction we can decide to step out.

With the UN PRI initiative the current situation is that we are taking stock of what we would need to do to adhere to the principles. We are not overstaffed and reporting is clearly a big part of the initiative. I would rather not sign up if we can only deliver half of what is really required. If you sign it you need to really stand for it.

PFI: APK has dropped its percentage of fixed income holdings for this year, in light of the current developments around Europe. How do you feel about this decision?

CB: First of all we already made some decisions in 2010 with regards to sovereign bonds, which we decided to decrease. In turn we wanted to increase corporate bonds and high yield bonds. We always look at opportunities that can arise from a certain situation too, but the risk of government bondsnow is higher than ever before so we have to look for alternatives. As a pension fund we have to check our regulatory investment rules. We always have a small allocation in government bonds but anything else needs to be beneficial for us, why else do it?

PFI: Do you think Europe is heading for a recession? What influence would this have on your scheme?

CB: I am not so convinced of a possible recession. I am always keeping an eye on what is going on in the real industry and I think there are still enough good opportunities and developments left. Maybe we are underestimating the possibilities of European companies. We are too 'depressed' and focus solely on government debt but you shouldn't just look at what the politicians do - companies and businesses can definitely make a change.

In Austria the consequences of the last crisis were pretty small in comparison to others but I think every country has its own "little Greece" as it were. We for example have a bank that needed to be nationalised and so did many other nations. But from a crisis you can also learn and that I think is what we did, we found ways to survive and learned from the problems that arose.

However, we need to acknowledge that there is a risk. Of course, it is just a matter of how high that risk is and we also mustn't forget that we can not generalise, Europe is very diverse as a continent with Poland, for example, still being very strong while others are struggling.

PFI: In your opinion what role could institutional investors, like APK, play in creating a more stable Europe?

CB: There definitely is a role for them but we have to get a chance to work with the market. Greece for example is completely dependent to go to foreign markets because they have no internal investment possibilities. If, on the other hand, you have a developed capital market within your country, due to the fact that you have a big pension fund market, you have better opportunities. And that is also a very important for Europe as a whole because in relation to other parts in the world, especially those which are developing currently, we have problems to recapitalise because we do not have enough investors that stay within Europe.

If you look at Asia you see that pension fund markets are growing far more rapidly. In Europe, yes we need good regulations but it must not force pension institutions to go abroad as they have proven to be good and stable investors. Now the danger is that they are being forced to do things that wouldn't be beneficial for anyone. Policy makers need to understand one thing: risk isn't always bad, it also provides opportunities.

PFI: What do you see as the biggest challenges for the pension industry in the next couple of years?

CB: During the financial crisis APK had to deal with a problem, a communication problem. We were seen as a financial institution, because we invest money. The need for pension schemes has not quite sunk in yet. That is something we need to work on – communication. However, the solution to the problem probably lies in time and education. Pension funds were introduced very late in Austria, they only came about in the 1990s, which gives us as a society little experiencein the industry.

25.07.2011

azeevalkink@wilmington.co.uk