Europe’s largest pension fund ABP has restructured completely how it goes about managing its assets. The E170bn fund has switched to being predominately in-house managed and 100% on an active basis designed to produce alpha.
“We are opening up a door to a completely new way of managing assets,” says Jan Straatman. CIO Capital Markets, based in Amsterdam, who has been responsible for implementing the new process.
“We decided that the traditional ways of implementing strategies would not be enough to generate these types of returns required,” he said. Actual returns were going to be lower in future and a passive exposure to capital markets would no longer be sufficient. The 45% the fund had on an indexed basis has been reduced to zero.
The focus is now on alpha generation, but ABP is not using the established managers for this purpose. Straatman says the underlying aim is now looking at how to identify inefficiencies in the market,
“What do we need to identify and exploit those inefficiencies? Our conclusion was that identifying skills rather than products really made sense. This meant a dramatic shift from a regional product-based organisation to a global skill-based organisation.”
He adds: “Every strategy has to have an approach that focuses on a certain inefficiency and there must be a real skill connected to that inefficiency so that the team implementing the strategy can exploit it on the scale ABP requires.”
The fund is very open to external managers and has put considerable resources into building systems to find those who can create alpha. “The focus is on new, exciting and often capacity-constrained ideas,” says Michael Stam, who is responsible for relations with external managers. “Where the opportunities are limited it does not make senses to build up the expertise ourselves.”
Stam runs a database containing “several hundreds” of managers of interest to ABP, which is used to screen, monitor and assess managers who could be partners with the fund. The focus is on long and long/short products , with hedge funds being handled on the separate alternatives platform.
Straatman says the fund has moved into much the same space that the hedge funds inhabit. “By bringing down the the barrier between asset classes and the type of investment process, we are able to take the same type of bets and hedge away the same type of risks, but we do not leverage up those bets.”
ABP has a team of 90 investment professionals, based in Amsterdam and New York. Last year, the fund returned a remarkable 11.5%, its best for a number of years. Straatman comments: “In terms of information ratios, we are in the first quartile.”
(See full report IPE Netherlands with this issue of IPE).