The Europa Clear Bank Commodities Fund provides access to commodities in key sectors such as agriculture and energy. The fund does not invest directly in commodities but in commodity-linked financial instruments. This enables us to realize exposure to liquid commodities as efficiently as possible. Investments in commodities help reduce the overall risk in a pension fund portfolio. This is because they show little correlation with most other asset classes in the long term. Commodities can also provide some protection against unexpected inflation. We follow a smart beta approach. This means that we may deviate from the benchmark significantly in order to invest in commodities as efficiently as possible. In doing this, we look at the duration of the financial instruments, the bench-mark-relative sector bandwidths, relative risk limits, liquidity and position limits on the futures market.
Our approach has resulted in a better risk-adjusted return than the benchmark. For 2016, the sector bandwidths are determined relative to the benchmark sector weights at -20%/+20% for energy, -15%/+10% for agricultural products and -10%/+10% for metals. In order to ensure a good spread in the portfolio, we keep a stake of at least five percent of both agricultural products and metals in the portfolio.
Our focused alpha strategy complements the smart beta strategy. This consists of internally and externally-managed commodity absolute return strategies aimed at a more attractive risk-adjusted return that is independent of general developments on the commodity market. Parties in the commodity sector that want to hedge risks dominate the commodities market. We anticipate this with active management in order to add return.
Portfolio construction, compiling a balanced investment mix
Compiling a balanced investment mix. An optimal return ensures the desired growth of pension assets. In addition, you want to hedge a part of the risks to cover your pension fund’s liabilities. A mix of investment funds allows for adequate management of your pension assets.
The fund’s risk return profile is, from a historical perspective, similar to that of equities, while there is a low correlation between the value development in the two. By means of the smart beta approach and active management, we aim for a return that is 50 basis points higher than the benchmark on an annual basis. There is a positive correlation between the spot prices of commodities and inflation. Because of this, commodities can provide some degree of protection against inflation, especially in the long term.