NETHERLANDS – The chief investment officer of Europe’s largest pension fund, the 133-billion euro Stichting Pensioenfonds ABP, has put his weight behind equities’ role in pension fund portfolios.
Jean Frijns said that Dutch pension funds’ exposure to equities – currently between 30% and 40% - was under pressure from all sides: the media, participants, consultants and actuaries, regulators, academics and accounting standards.
He outlined four reasons why equities should belong in the asset mix of a pension fund. He said equities belonged in a pension portfolio if they met a required return target and if the risk consequences were “clear and accepted”.
He added that they should be part of a portfolio if the specific pension fund characteristics implied a long investment horizon and if there is a “clear and sufficient” set of policy rules governing their inclusion.
He made the remarks at a conference hosted by ABN Amro Mellon Global Securities Services in Amsterdam.
Noting that an affordable pension requires a rate of return of 6.5% or more a year, Frijns asked what was the best way to achieve that return in a low return environment.
He said the expected return on long-term bonds over the 2003-2017 period was 4.5% and the expected return on equities over the same period was 7.5%.
He provided two examples of asset mixes, one with 40% bonds and 60% equities, the other with 40% bonds, 40% equities and 20% alternatives. He said he expects the second mix to outperform the first. A 100% bond portfolio, he said, “significantly underperforms” both the other mixes.
Earlier this year the civil service fund reported a 7.2% decline in its capital value in 2002 but said it saw no reason to change its investment strategy. In January Frijns said ABP held 29% of its assets in stocks at the end of 2002, down from 37% at the end of 2001.
“We believe that in the long term equities will outperform fixed income,” Frijns said at the time. ABP is currently in dialogue with its social partners on improving its financial position.
Separately, ABP has rejected criticism in the Dutch press that it does not take corporate governance seriously.