The €19bn Philips Pensioenfonds has divested a significant part of its euro-denominated government bond holdings in favour of cash and equity in anticipation of rising interest rates.It has reduced its 60% matching portfolio of fixed income holdings to 50% of the Dutch scheme’s overall assets. The reduction came fully at the expense of Philips’ stake in euro-denominated bonds, which decreased from 35% to 25%.Its allocation to worldwide bonds and credits as well as mortgages – each amounting to 5% – remained unchanged. It has not changed its allocation to high yield credit or emerging market debt, both of which are in Philips’ return portfolio.As part of the portfolio adjustment, the pension fund increased its cash holdings from 1% to 7.5%. It also ramped up the allocation to equity by 1 percentage point to 30%, and increased property by 2.5 percentage points to 12.5%. A spokeswoman for the pension fund said the the re-investment focused mainly on security and less on returns.“In particular given the high valuations of equity [markets], we didn’t want to run too much additional investment risk,” she said. “Because the implementation of a property investment can take a long time, cash is an attractive alternative, as it helps to prevent a reduction of the interest risk leading to an increase of investment risk.”The Philips scheme also indicated that it had opted for cash because of the flexibility of the asset class. “Were interest rates to rise, we could simply increase the interest hedge,” said the spokeswoman.During the fourth quarter, the pension fund lost 2.8%, including 0.4 percentage points as a consequence of its interest and inflation hedge.It attributed the loss largely to the decrease of government bonds of developed countries in the wake of rising interest rates.The pension funds has hedged 29% of its liabilities in real terms, while it has covered 9% of the inflation risk.During the past year, the Philips Pensioenfonds returned 10.6% on investments. Its funding stands at 113.9%.