German $82 Billion Pension Giant Seeks Outside Help to Growby
Bayerische Versorgungskammer steers clear of zero-yield bonds
Specialist third-party managers needed to diversify assets
Bayerische Versorgungskammer, Germany’s biggest pension fund, is hiring more external managers as it diversifies away from low-yielding government and covered bonds.
“We will invest more in assets such as high-yield, emerging-market debt and infrastructure where we rely on external experts,” Andre Heimrich, who helps oversee 75 billion euros ($82 billion) as BVK’s chief investment officer, said in an interview in Munich. “We will increase the share of third-party funds managing our investments to 65 percent over the next three years from 45 percent.”
Quantitative easing and low bonds yields have left pension managers from Europe to Japan facing a growing shortfall in funds to cover payouts to future retirees. To narrow the gap, they may seek to boost returns by buying riskier assets, delaying or cutting payouts, or tapping their sponsoring companies or institutions for additional capital.
“The changes to our investment mix will add more volatility to our returns,” said Heimrich, who became CIO in 2013. “That could well mean that we won’t meet targets each year but we have that flexibility on the liability side of our balance sheet.”
BVK oversees 12 compulsory retirement funds for 2.1 million people including doctors, pharmacists, Bavarian lawmakers and chimney sweeps. The manager targets an average return of 4 percent and has already cut commitments for new pensions to reduce the pressure to produce gains.
“There might even be some years with negative returns,” Heimrich said. “But we will deliver our return targets over time and that’s important for us as long-term investors.”
BVK plans to increase its private equity investments and infrastructure over the next three years while commitments to hedge funds should remain stable, the CIO said.
Its plan to rely more on third-party managers in order to diversify its investments contrasts with decisions by other pension managers including PFA, Denmark’s biggest commercial pension fund. These have cut out middlemen like hedge fund managers and are investing more of their assets directly to save fees as ultra-low yields weigh on returns.
“I’m not so much concerned about costs of external managers as they are still able to outperform in specialist markets,” Heimrich said. “While it takes us less than an hour to analyze a government or covered bond, it would need much more to do that for private equity or infrastructure. That simply doesn’t work for us.”
To boost returns, BVK has also increased direct lending in recent years as banks cut back on advancing credit to repair their balance sheets. In July, it agreed a 200 million-euro loan to municipal housing company ABG Frankfurt Holding.
“While banks are coming back, bringing more pressure to margins, we can provide about 800 million euros of direct lending each year and we are continuing to pursue such projects,” he said, adding that BVK has to reinvest about 7 billion euros each year. “We have also started to add national and international real estate projects in the development phase to our investments.”
The fund increased its allocation to UBS Asset Management’s real estate unit to 1 billion euros from 750 million euros in September.
BVK has avoided buying low and negative-yielding bonds for now but regulations may force the manager to become a purchaser by 2019 as it could reach the limits of its legal allowance to invest in riskier types of assets, according to Heimrich.
“For long-term investors like us, volatility isn’t the biggest risk,” he said. “It’s rather assets such as government bonds and covered bonds that would mean locking-in inadequate returns for years to come.”