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Choosing The Right Index
By Paul Amery | 26 April, 2012

Imke Hollander, equity strategist at Blue Sky Group, manager of the KLM pension funds, tells Paul Amery, editor of about her firm’s increasing use of alternative beta strategies. Imke will be talking about “Choosing the Right Index” at our forthcoming conference in Amsterdam, Inside ETFs Europe, on May 15-16 Please describe how Blue Sky operates

Hollander: We are the fiduciary manager for the three KLM pension funds. These represent over 90% of our overall assets under management. We also represent some other corporate and industry-wide pension funds. What’s the overall asset allocation for the KLM pension funds?

Hollander: Strategically, our clients have around 30-40% in equities, 10-15% in real estate and typically 45-55% in fixed income. Within equities, what percentage is held in index-following mandates?

Hollander: We index about 60% of the portfolio.  For some of the funds there is a small allocation of around 5-10% of the equity segment in environmental, social and governance (ESG) strategies. Defensive equity strategies make up 5% of the portfolio of most of our customers, and that’s soon to rise to 10%.  The rest is in traditional strategies, based on capitalisation-weighted indices, where we follow the MSCI IMI benchmarks in different geographical regions. What has prompted your move into defensive equity strategies?

Hollander: We’ve always been interested in quantitative equity approaches, which of course include so-called alternative beta strategies. The market turmoil at the turn of the century and again in 2007-08 also stimulated our interest in this area.

It’s probably also worth pointing out that some of our pension fund clients are quite conservative by nature. Our pilots’ pension scheme, for example, has used an option overlay strategy since 2002: we buy average price put options, with a fifth of them expiring each year.

Our defensive equity index strategies are based on the prospect of lowering portfolio volatility but maintaining the level of prospective returns.  The advantage is that these strategies can reduce the volatility of the equity portfolio, which in turn translates directly into a less volatile solvency ratio. This principle has great appeal to us since alternative ways of reducing risk—increasing the portfolio weighting in fixed income, for example—would be more expensive from a funding perspective. What kind of defensive equity strategies do you use?

Hollander: We have a mixture of low-volatility and maximum diversification strategies. We’ve looked at other non-market cap weighted strategies as well, but decided they were of less interest for this particular portfolio, because they offered a less favourable maximum drawdown or a smaller reduction in volatility. We want defensive equity and some of the other strategies were not defensive enough.

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