Pension funds should 'beware' calls to boost domestic investment
28 Sep 2012
EUROPE - Pension funds must be wary of lobbying efforts to encourage greater domestic investment at a time of bank deleveraging, according to a Dutch professor and trustee at employment agency pension scheme UWV.
Speaking at an Allianz Global Investors event earlier this week on the risk of financial repression and the role pension funds play in such a policy environment, Johan AM de Kruijf, assistant professor at the University of Twente, spoke out against recent calls for pension funds in the Netherlands to take on loan books currently held by the nation's banks.
"In the Netherlands, there are discussions about how pension funds can take over some of the work that the banks are not doing - offering mortgages and making loans," he told attendees.
"But, given the huge level of liabilities we have, it's just not possible. We would end up entirely concentrated in the risk of our domestic economy."
He added: "I don't think we will face actual legislation on this, but we certainly see a lot of pressure from lobbying groups, and that political aspect of the role of long-term investors [in the domestic economy] is under direct discussion."
His comments come after Jean Frijns, professor of investment management at Amsterdam's Free University, predicted earlier this summer that politicians would increasingly seek to get involved in pension fund asset allocation decisions, branding any such move "nationalisation".
Speaking at the same event, University of Oxford academic Gordon Clark said the most effective way for investors to combat the pressures of financial repression - which speakers outlined as meaning either inflation coming in ahead of central bank expectations, bond yields and bank balance interest rates turning negative, or GDP growth outstripping bond yields - was with a well-diversified portfolio, including alternatives.
At a similar event held this week by AGI in Munich, chief executive of AGI Europe James Dilworth outlined the problems of what he deemed financial repression affecting the euro-zone.
He said investors considering emerging market debt would be exposed to higher returns and lower volatility than by investing in the German 10-year Bund.
"This throws the whole concept of modern portfolio theory on its head," he said.
Dilworth said the problem was similar for parts of the pensions industry, highlighting how the record low yields in many euro-zone countries had negatively affected pensioners' ability to buy an annuity - with prices for a €50,000 annuity in Germany 22% higher at present than it would have been three years ago.
AGI global chief investment officer Andreas Utermann echoed Clark and Dilworth's call for greater diversification, citing high-yield bonds, emerging market bonds and currencies, as well as dividends and long-duration assets such as infrastructure equity or debt as possible investment options for long-term investors.
"Of course, even a strategy such as buying dividend stocks can become less attractive if governments decide to tax those dividends to a greater extent, as we see in France, for example," he said.
"But, ultimately, the key task for investors is to try to get real yield, and the most important impediment we face is our tendency not to act.
Utermann added: "It's like the frog in the pot: put him into hot water, and he will jump out immediately. Put him into cold water and slowly turn up the heat, and he will sit and boil to death."