Fonds de Compensation’s, Luxembourg’s €16.5 billion ($19.4 billion) reserve fund returned 3.9% on its investments in 2017, but it was just shy of its benchmark by four basis points.
The near miss came despite decent stock returns. Overall, its equity investments returned 8.8% in 2017. Of that gain, global equities and small cap stocks contributed 7.2% and 9.9%, respectively.
Fonds’ emerging market stocks were at their best since 2010, with a 20.6% return of its benchmark, IPE reported. Unfortunately, the fund’s three managers underperformed in this area by three percentage points, which led to a termination for one of them in December.
Bonds, real estate, and money market funds produced much smaller returns at 0.9%, 0.7%, and 0.2%, respectively.
The results come after the Luxembourg reserve fund revamped its investment strategy last year to take on more risk. This is the third time Fonds has revised its strategy since 2007, according to IPE.
The 2017 strategy now sees a higher stock allocation. Equities have been increased from 32.5% to 40% of the portfolio, leading the fund to cut back on safer sectors like bonds and money market funds. This move caused the risk budget to grow, but it didn’t reach the 20% goal envisioned by the new strategy.
Additional asset classes were not looked at in the revision, but the pension reserve did show some consideration for private equity and private debt allocations. Sustainable investing, however, is something Fonds is looking to expand on.
In that area, the fund is considering only working with managers who meet its sustainability requirements, and will allocate to stocks and bonds that intend to make a positive social or environmental impact.
The type of impacts the fund is looking for these investments to adhere to will be based on the United Nations’ Sustainable Development Goals, a 17-goal code created by the global organization which cover a broad range of social and economic developmental issues.