BELGIUM - KBC Pensioenfonds has significantly diversified its real estate allocation within the last eight months, in a bid to match the scheme's liability-driven investment (LDI) strategy.

Edwin Meysman, managing director of KBC Pensioenfonds, told delegates at the Institutional Fund Management conference in Geneva, Switzerland, the €950m fund significantly altered its strategic asset allocation in June 2007 and widened the range of investments invested inside its real estate allocation, to reduce volatility in its potential returns.

While the actual amount invested in equity, bonds and real estate has not moved from 50%, 40% and 10% respectively, the sectors within that breakdown have widened inside the real estate allocation to introduce senior housing, timber, infrastructure and private equity fund of funds.

"We made changes to the 10% real estate as it had been allocated 10% direct and 90% in listed real estate securities," said Meysman.

"We shifted because we want to have real estate to do both the hedging and the return. So we moved to:

50% listed real estate securities 20% direct investments 5% senior housing 5% timber 10% infrastructure - for liability-matching 10% private real estate fund of funds (REFOFs)

"We still have 6% expected return but with reduced volatility, an improved budget for contributions, pensions expense and cash flow planning, and we have costs under control yet expected returns remain unchanged," he added.
said Meysmans.

While the credit crunch has had a minor impact on its early investment returns - reducing the value of the fund slightly from €1bn in June 2007 to €950m today - the fund's liability-driven investment (LDI) strategy has reduced potential volatility and shored up its cash flow position, in part by investing in listed real estate and private REFOFs for returns while allocating to the other sectors as the liability-matching.

Meysmans pointed out the fund does not perhaps have the same liabilities as pension funds elsewhere in Europe because the Belgian regime means with no annuities to consider, on the part of the fund, officials do not have to address longevity.

That said, it will have to pay out to half of its 20,000 membership within the next 10 years once they retire beyond age 60.

As a result, the scheme has also shifted its fixed income strategy to extend the average seven-year bond duration closer to its 11-year liabilities - cutting its 85-95% funding ratio volatility over five years to 87-93%  - along with leveraging strategies which effectively doubles the total allocation to 80% and give a funding ratio of 86-88%, and moved to inflation-linked bonds to reduce volatility of fixed income investments from 77-85% over the same period to 85-86%.

Preliminary results, though extremely short-term, show the funding levels has increased from €308m to €318m in a six-month period but "should still achieve an expected return of 6% in the 10-year period".

The remaining equity assets are split to place 45% is in listed stock and 5% in private equity.

KBC Pensioenfonds was named Best European Fund at the 2007 IPE European Pension Fund Awards in Vienna, in November, as well as picking up three other titles.

IPE is sister publication to IPE Real Estate, part of the IPE International Publishers Ltd group.