Investors on both sides of the Atlantic, having been preoccupied for several months, now have clarity on several fronts. The general perception is one of political risks having lifted; and we also note that the European economy is accelerating convincingly. But now certain underlying issues are returning to the forefront, impacting the management of Pension Funds assets in both tactical terms, and strategically.

So we see two over-arching themes return to the forefront for long-term investors : on the one hand, a normalized policy mix, and on the other a return to managing market risk. This return to fundamentals is logically reflected in the orientations of pension fund managers, or in the underlying portfolios, regarding monetary policies, asset performance drivers, and risk-free rates, among other factors. 

First of all, the macro-economic and financial environment. A key feature of how markets evolve, particularly when driven by monetary policies, is price movements –whether inflation or deflation are occurring. Both have consequences in terms of capital preservation or future income. Over the last few months a certain number of new elements have appeared, showing not only the current inflation rates, but also improving expectations. These are already causing the Fed to react, and later the ECB, followed by the bond markets both in terms of interest rate levels, and the shape of the yield curve. 

Then, portfolio construction.Against a back-drop of creativity in monetary policies having run their course - but also, in some countries, of these policies beginning to have an effect, the notion of a « risk-free rate » is again becoming crucial for CIOs and trustees in charge of strategic asset allocations. And in some cases also for the modeling out of expected returns. As risk free becomes risky…. 
And finally, market tendencies:US rate expectations down, perception still seems to be ‘enough growth, benign inflation’ good for stocks, as measured by technical factors. Taking into account the current position in the equity cycle the call is clearly in favor of positive contribution of dividends to return. 

And one must not forget the legal and regulatory framework within which Pension Funds must operate, for example in Germany: this brings us to an update on the Contractual Trust Agreement (CTA) structure. From the corporation’s standpoint, but also as viewed by employees, at a time when many «investment cases» are coming up, often involving cross-border European M&A. 
All we have covered above allows us to better take into account the pension funds’ decision-making parameters, including both constraints and portfolio management objectives, in a still-unusual context regarding rates and the valuations vs volatility tradeoff in equities.


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Global Head of Corporate Pension & Insurance Segment at Amundi
Bastien DRUT
Head of Thematic Macro Strategy, CPR Asset Management