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ABP plans to allocate 20% to alternatives

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NETHERLANDS – Stichting Pensioenfonds ABP says its new strategic asset allocation targets an allocation of 20% to alternative investments such as hedge funds and private equity, adding that avoiding short-term risk is “not on option”.

“In its strategic asset allocation, ABP has opted to allocate 20% of the portfolio to ‘alternative investments’,” the fund said. It defines alternatives as all investments other than equities and fixed-income investments, including real estate, private equity, commodities and absolute return strategies (hedge funds).

The 150 billion-euro civil service scheme said in its annual report: “The principle that it is necessary to incur investment risk in a responsible manner in order to achieve the objective of providing adequate pensions at reasonable contribution rates is and will remain central to the proposed investment policy.”

“An investment mix in which ABP avoids short-term risk is not an option.”

“Given the very poor long-term results of such strategies, ABP considers this an ill-advised choice. A sound financial policy requires a yield of 6%–7%, which cannot be achieved without a substantial percentage of equities and alternative investments in the mix.”

It said the allocation was revised to address its “weakened financial position” and lower yield forecasts. “Compared with the previous plan, the target for the share of equities in the mix has been adjusted downwards and hedging of the dollar exposure has been increased.”

The new plan will see more corporate bonds and mortgage-related products “in the mix”, at the expense of government bonds.

ABP said alternatives are “vitally important” as they provide diversification.

ABP has been investing in hedge funds since 2002 and invests in both direct hedge funds and funds of hedge funds.

It said the strategic investment portfolio consists of 44% fixed income, including high-yield, 36% equities and 20% alternatives.

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