The first European pension fund to establish a US investment office describes its thinking
SETTING up the office of ABP Investments US in New York, began in the summer of 1998. Since then, 25 people have been working there, more than half of them Americans. The majority of the seven or eight people still needed will also be locals. Once they have been recruited the office will be at full strength.
Paul Spijkers manages the office on the sixteenth floor of 450 Lexington Avenue. He sums up the office’s responsibilities: “We are supervising the American equity portfolio, which is still fully under external management. The size of the portfolio will be approximately $22bn by the end of 2000. We invest in real estate by buying shares in Real Estate Investment Trusts. This portfolio is currently being expanded, and will be worth $3.5bn at the end of next year. The office functions as an outpost of the Amsterdam office for real estate also.”
Fixed-income: The third category of investments, US fixed income, is Spijkers’ direct responsibility. “The portfolio which was already under external management, is being monitored by us in New York, while we manage new money invested ourselves. Structuring that process is in full swing. At the end of 2000, this portfolio should be worth $14bn.”
He continues: “Part of the existing fixed-income investments in the US will come under our own management while we will be carrying out new investments ourselves. In the end, 10% of the entire fixed income portfolio will continue to be managed externally.”
What kinds of investment do they involve? “It is not a market in which you can place orders unnoticed. We are talking about highly specialised portfolios. They are the result of the strategic decision to diversify the fixed income portfolio and shift the emphasis to markets that can deliver higher returns than the government bonds we have always been investing in. In the US, they involve corporate loans and mortgage loans. These markets are not fully developed in Europe, but significant growth is taking place. They have existed for a while in the US, so that we can speak of a mature market there. If you have opted for this strategy, there is actually only one appropriate approach, that is to manage the portfolio yourself in the US. In order to be able to manage American fixed income portfolio of this nature, you need particular specialist knowledge which is not available in the Netherlands. The alternative, bringing the entire portfolio under external management is very expensive.”
The savings made by setting up a specialist organisation in the US that can manage the portfolio itself is not the only advantage. As already mentioned, the European market for corporate loans and tradable mortgages is gaining ground strongly. The knowledge being accumulated in the American market segments can subsequently be used to help build up the organisation in the Netherlands.
Real estate: “Our real estate investments in America follow the same principles as our investments in the rest of the world: building up strategic interests in real estate companies, the majority of which are stock-listed. At this time we already have a portfolio of some $3bn. In order to assess the underlying real estate portfolios properly, local presence and experience are an absolute necessity. Building up and maintaining networks of people and organisations working in the American real estate market is another important facet of this strategy. We were lucky to succeed in putting together a team of three professionals together having more than 30 years of experience in this market and who know the peculiarities of these markets inside out.”
Equities: The activities of the New York office are focused on supervising external managers. It involves supporting the selection of new external managers of equity portfolios. The New York office is also monitoring the network that had been built up from the Netherlands. ABP Investments is working on a considerable expansion of the portfolio. It amounts to $16bn now and will be raised to $22bn by the end of next year.
Risk management: How does a fund evaluate the chances of success as it can certainly reach the heights in New York, but it can also plunge to the depths? “You can consider risk from two different points of view: investment risk and operations risk,” says Spijkers. “The strategic investment allocation comes about by carefully weighing the investment risk on the one hand against the investment return on the other, taking into account the differences in investing in Europe and in the US. The operational risk has an organisational nature to a large extent. We not only have investments in the US after all, but our own organisation that manages them on the spot. This does not mean that the risks increase, but it is their nature that changes. As long as you have analysed the differences correctly and you are aware that they exist, you can steer things in the right direction. You have to set up the company according to the ‘best practice’ standards of the country in which you are located. In addition, it is critically important for international organisations - such as ABP now is – that the bond with the parent company is not allowed to weaken,” he says.
International colleagues: “Americans do not necessarily find it interesting to work for a foreign company. The size of the portfolio is important to an American. Working for ABP appeals to the imagination and the bonus is the extremely interesting professional contacts with Europe. It wasn’t easy, but we succeeded in finding good Americans who wanted to work with us and help set up the organisation in its all its aspects. The Americans Barden Gale (real estate), Arnold Shapiro (fixed-income) and Jeanine Presa (administration) have already succeeded in putting together a team of professionals we can be proud of,” says Spijkers.
He adds: “I would even go as far as saying that Americans work harder than the Dutch.”