Few German pension funds have endured the scrutiny of 10,000 chartered accountants. Fortunately for Düsseldorf-based WPV, the industry-wide pension scheme for two-thirds of Germany’s 16,000 chartered accountants, returns were in excess of 3% last year. The €1.2bn hybrid DB/DC pension scheme benefited by a number of strategies, chief among them: constant proportion portfolio insurance (CPPI).

WPV had a 20% plus exposure to equities at the end of 2006. This compares to a 4% (not regarding the CPPI overlay) weighting in the asset class today. The fund first employed CPPI in 2003, says Gianfranco Palumbo, Head of Portfolio Management.
 
CPPI is the name given to a trading strategy that involves continuous re-balancing between performance assets (equities) and safe assets (cash and bonds) using a mathematical formula; as such, it is a rules-based strategy and non-discretionary. As a capital guarantee derivative security, CPPI adjusts exposure to equities so that the underlying portfolio is able to absorb a defined decrease in value before the value of the portfolio drops below the level required to achieve principle protection. The asset allocation process allows investors to participate in a rising equity market, while reducing exposure during downtrends. The allocation between cash and equities is determined on a daily basis. The amount of the allocation to the performance asset is set by a multiplier.

While a flexible method of managing risk, if the value of equities drops sharply and quickly, difficulties can arise in adjusting the allocation to stay in line with the prescribed formula. Upon entering a CPPI contract, the provider guarantees from the first day that the product will be worth a pre-determined amount as resulting losses beyond the guarantee level are assumed by the provider.

Looking ahead

WPV had a sizable cash position deposited in banks in 2008. Its cash build up had started in April 2007, with corporate yield spreads near historic lows, WPV sold the fund’s global corporate bond portfolio. Gianfranco Palumbo now finds value in corporate bonds and maintains a position in convertible bonds.

WPV is now about 70% invested in bonds with a heavy weighting in German sovereigns with maturities longer than 10-years. In addition, WPV has a 15% position in property. These investments are made via special vehicles and mutual funds with direct property holdings. The geographic focus is old Europe. WPV has also made its first investments in Asia and is eyeing the United States.

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