FDC's current investment strategy 

Global strategic allocation

Strategic allocation per as
set class

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Investment approach and strategy

Investment approach

The financial balance of the general pension insurance scheme and consequently of the reserve managed by the FDC basically depends on macroeconomic factors. The major risk of a lack of financial stability consists of a slowdown in the growth of the working population or even a decrease of the latter. FDC's return on investments has therefore only a secondary impact on the financial balance and a possible future deficit may not, under any circumstances, be financed by the return on investments. Given these facts, the principles of an asset-liability management could not be used as a basis for setting up the initial investment strategy. The set up of an investment strategy was therefore focused on an optimisation of the investments and a maximisation of the return with regard to certain factors, namely:

  • liquidity requirement;
  • investment horizon;
  • risk tolerance;
  • minimum rate of return;
  • choice of investment categories.

Additionally, the FDC has a very low liquidity requirement given that the general pension insurance scheme still has a surplus of contributions over pension liabilities. Therefore, FDC's assets do not have to contribute towards an immediate financing of pension liabilities. Consequently, it was possible to consider as a basis a long-term investment horizon.

The value at risk (VAR) method expressed in percentage of the total assets is used to build up the risk budget. This concept, widely applied in the financial industry, identifies a maximum loss threshold that should not be exceeded with a defined probability over a specific time horizon.

In addition, a minimum rate of return of 3.80% was set during the initial investment strategy formulation. This target rate was chosen in a way to at least allow compensating the impact of real wages growth and inflation on the level of the reserve while, at the same time, covering the asset management fees.

The choice of the initial investment categories took place in two stages. The first stage was to decide on the overall allocation for which only traditional categories of assets (equities, bonds and liquidity) were taken into consideration, this in accordance with their respective degree of risk. These traditional categories of assets represent a systematic risk premium and can therefore be modelled on the basis of historic data. In a second stage, other categories within the traditional categories of assets were considered in order to determine the more refined allocation, this again by taking into account the degree of risk specific to each investment category. This second stage allowed a qualitative improvement of the overall allocation and the specification of the regional structure of the overall portfolio.

FDC's Board of Directors foresees to revise the investment strategy on a five-year basis, or upon exceptional occurrences. A first review was undertaken in 2008 and a second one in 2012. Each time, taking into account the lessons learnt from the latest financial crisis, the fundamental parameters were updated and the minimum rate of return as well as the risk budget were redefined. In case the main principles of the investment strategy remained unchanged during these reviews, new assets classes were considered and successively implemented, such as emerging markets equities, small cap equities, emerging markets government bonds and ultimately in 2016 global real estate.

In 2017, the Board of Directors proceeded to another major review of the investment strategy. The first part was dedicated to an update of the fundamental parameters, especially the ones used for calculating the expected return target and risk data. It also analysed opportunities to incorporate new asset classes. The second part focused on the future directions of FDC's socially responsible investment policy.

In view the recent expectations on real wage growth, the inflation in Luxembourg as well as the asset management fees linked to the SICAV, an annual minimum rate of return between 1.95% and 2.4% has been determined. In this context and taking into consideration the projected evolution of the general pension insurance scheme still confirming FDC's predetermined long term investment horizon, the existing strategic equity quota has been increased by 7.5%, this by reducing the actual strategic money market and bond quotas, resulting in a maximum value at risk of 20%. New asset classes were not considered in the 2017 review, however medium-term reflections about an integration of potential private equity and private debt sub-funds were retained.

With regard to the future directions of FDC's socially responsible investment policy, it was decided:

  • to significantly strengthen, at the level of active management, the use of sustainable or socially responsible investment criteria in the decision-making processes. More concretely, the aim is to award in any future tender mandates only to active portfolio managers integrating next to their financial analysis a sustainable or socially responsible investment analysis in their decision-making processes;
  • to launch new equities and bonds sub-funds dedicated to investments with positive impact ("impact investing").

FDC's current investment strategy

The overall equity portfolio has a strategic quota of 40% and is composed of global equities, emerging market equities and small cap equities portfolios, the two latter asset classes representing a total quota of 10%.

With regard to bonds, the strategic allocation foresees a global bond quota of 23% hedged against currency risk. A quota of 25% is allocated to euro-denominated bonds. Given that global bonds provide an alternative to euro-denominated bonds, this nearly identical percentage allows a more effective diversification in an overall bond portfolio. It should be noted that the assets related to loans, transferred to the FDC at the beginning of 2009 by the former pension institutions, are incorporated into the euro-denominated bond category as they are very similar to fixed income securities in terms of risk and return. Finally, a quota of 2.5% is allocated to emerging markets bonds, the overall bond allocation thus amounting to a total of 50.5%.

The strategic liquidity quota has been reduced to 1% of the total assets under management.

The property assets represent about 3% of the total assets and are entirely located in the Grand Duchy of Luxembourg. In order to integrate these assets most effectively, a Luxembourg property assets category was created and the assigned quota equals 5%. Also, a global property assets category, with currently a 3.5% quota, was created in order to avoid exposure to the Luxembourgian real estate market only. The overall property portfolio therefore amounts to 8.5%.