Spain’s BBVA Pensiones V (BBVA) is a €145m hybrid pension fund. It has a diversified global investment portfolio that it has been seeking to adapt in recent years in preparation for lower expected future returns. It uses a mix of direct and indirect investment and blends active and passive approaches.

Over the past five years, BBVA has increased its emerging markets equity weighting from 2% to 13% of the overall equity portfolio, and it has implemented a similar change to its fixed income (FI) holdings from 2% to 6% of the overall bond portfolio. This is based on an expectation of higher economic growth in emerging markets than in developed markets, and on an assessment that these economies tend to be less leveraged.

Last year, the pension fund focused on improving its strategic asset allocation framework, establishing a five-step process. This involves formulating a view on every investable asset class, undertaking qualitative and quantitative assessments, analysing historical returns, the application of relevant constraints, and portfolio optimisation.

This new process has led to the introduction of Chinese onshore bonds and frontier markets into the FI portfolio. The fund cites China’s size and diversification benefits as key reasons for inclusion, while frontier markets have been added to reduce concentration risk.

A new tactical asset allocation approach has also been added to ensure a balance of flexibility and discipline in making shorter-term decisions. The ‘scorecard’ approach are rules-based models and have been applied to both emerging markets equity and FI assets.

BBVA also leveraged the scale of a third-party investment manager to develop two passive mandates, one for FI and one for emerging markets equity. By collaborating with other institutional investors, the pension fund was able to cut management fees by 46%.