Asset management costs at Dutch civil service pension scheme ABP increased from 60.9 basis points to 64.5 basis points in 2017 – including higher fees to hedge fund managers, despite the scheme’s allocation losing 7.5%.
ABP spent the most, in absolute and relative figures, on private equity and hedge funds, according to its annual report. For both asset classes the scheme increased its spending relative to 2016.
Of ABP’s 64.5 basis points paid in total management costs, hedge funds and private equity accounted for 39.3 basis points.
In absolute terms, ABP paid just over €1bn of management fees for private equity and €505m for hedge funds, on a total invested capital in 2017 of €18.9bn and €18.5bn respectively. This marked an increase in absolute and relative terms compared to 2016, despite a sharp drop in returns in both categories.
Private equity generated a return of 9.7% (€1.7bn), compared to 14.8% in 2016. Hedge funds turned 7.9% gain in 2016 to 7.5% (€1.5bn) loss last year.
ABP still spent more on costs because this performance was better than the asset classes’ benchmarks.
Dutch healthcare scheme PFZW, which published its annual figures last week, also reported an increase in asset management costs. ABP stated that, just like PFZW, the increase was due to higher performance fees. Its management fees decreased.
ABP’s total investment return came to 7.6% for 2017, down from 9.5% in 2016.
The board of trustees called the high costs for private equity and hedge funds “striking”, since the investments in these categories accounted for 10% of total assets while absorbing 60% of total asset management costs.
However, the board said the high costs for private equity and hedge funds were justified because of their positive contributions to the scheme’s return and risk profile.
Within the hedge fund allocation, the return on investment in US dollar-based hedge funds was positive. By partially hedging the currency risk, ABP booked a return of 3.4%. However, the effect of the dollar on the investments was still negative, meaning ABP lost €1.6bn on its interest rate hedge.
The Netherlands’ regulator, De Nederlandsche Bank (DNB), reported in December that Dutch schemes’ management costs fell slightly during 2016, from 0.47% to 0.45% on average.
DNB data collated by IPE’s sister title Pensioen Pro in March indicated that the country’s pension schemes were in aggregate reducing their exposure to hedge funds.