EUROPE - France's €11bn public pension fund for civil servants (ERAFP) will continue to invest in domestic sovereign debt despite the recent downgrading of the country by Standard & Poor's.

Speaking with IPE just before S&P lowered France's credit rating from AAA to AA+ on Friday, Catherine Vialonga, CIO at ERAFP, said the pension fund was more concerned about risk of default than risk of downgrade when it came to investing in sovereign debt.

She said the risk of a French default was very low and that ERAFP would therefore continue to invest in the country's sovereign bonds. 

However, she did add that if the downgrading of an EU member state were "too severe", the ERAFP might review both its risk assessment and asset allocation.

Vialonga also stressed that the public pension fund would remain cautious on the debt of Germany - one of the few euro-zone countries to have kept its AAA rating.

In a previous interview with IPE in November last year, the ERAFP argued that German 10-year bunds offered a relatively low return on investment.

"Even though Germany remains one of the strongest countries in the EU, we cannot believe the country will be spared by a potential implosion of the euro-zone," it added.

Vialonga said the fund would continue its asset diversification strategy this year by targeting convertible bonds and real estate, as government sovereign debt had proved riskier than anticipated.

With regard to alternatives, the ERAFP is looking at private equity, real estate and infrastructure, focusing on asset classes that offer a natural hedge against inflation.

Vialonga added: "Our aim is to maintain the current benefits paid to our contributors. As a result, we need to target assets that are correlated with inflation and offer a protection against the inflation risk."

She said the fund would spend the coming months analysing the risk/return profiles of a number of alternative asset classes before deciding whether to increase its asset allocation.

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