Jean Frijns, CIO of Europe’s largest pension scheme, the e146bn Heerlen-based ABP fund, opened the seminar sessions ahead of the second annual IPE Awards with a warning to pension funds that extreme market events were becoming more frequent – resulting in greater short-term volatility and a need for pension scheme long-term investment horizons to be stretched.
In response, Frijns noted that pension funds should seek to increase the robustness of their long-term investment strategies and strengthen their capacity for risk absorption in stressful times.
This, he said, should involve exploring the risk capacities of pension funds: “We cannot be satisfied with the traditional asset mix. There is a need to expand the investment universe to look at more alternatives – hedge funds and private equity and to look at commodities, capped bonds or index-linked bonds, for example.”
Frijns further advocated the use of more buy-and-hold strategies by pension funds and argued that they could also look at tactical opportunities in the buying and selling of volatility.
He added: “Another area where pension funds should be more active is on corporate governance and sustainability issues for corporations. If pension funds are active on this side then it will make their investment strategy more robust.”
Frijns explained his thoughts by pointing out that pension funds today exist in a world where short-term return distributions are affected by extreme events, which are “not that rare any more”.
“They occur once every two or three years, instead of once every 20 years, which is the way we used to think. We can expect this trend to continue due to the integrated nature of global markets today.”
The ABP chief posited two investment scenarios going forward. The first he labelled the ‘stress regime’: “This would have negative returns and be an environment where diversification doesn’t work anymore and even diversified portfolios suffer from increased volatility.”
The second, he called the ‘normal/historic’ regime: “This has low correlation, no extreme events and diversified portfolios have low volatility. The problem is you can’t know ex-ante which of these scenarios you are in.”
Frijns said he believed that if the ‘stress’ scenario characterised both short-term and long-term return distributions then there could be a “complete breakdown of all the lessons we have learned about investment.”
“There is no guarantee for short-term stability at the moment, which is why the long-term investment horizon for pension funds can no longer be five, but 10 to 15 years.”
Over the medium term, Frijns argued that the next three years would remain uncertain in terms of economic growth, with Europe and Japan persisting with disappointing growth figures and the risk of further surprises to come.
On a positive note, however, Frijns opined that if US companies consolidated over the next few years then a faster than expected recovery might not be unexpected.
One issue that the ABP investment head took great pains to stress was that the current market environment was not a time for passive investment strategies. “This is the time for active equity and credit selection. It really is worthwhile to be very selective in picking stocks or credits and most of all trying to avoid concentration risk. You have to ask how much exposure you have to individual companies between equities and credits.”

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