SWITZERLAND – Roderick Munsters, chief investment officer at Dutch civil service fund ABP, says he loves risk because it produces returns.
He told a conference that pension funds should be able to run risks and produce returns in the long term.
“I love risk. I like it because it produces returns for me,” Munsters told the fifth annual Institutional Fund Management event in Geneva.
He emphasized that pension schemes should be able to sit through a down-cycle with, amongst others, a good balance sheet and a well-structured pension fund. Operating only on a short-term basis could be “very expensive or very bad”.
Munsters stated that the roughly €200bn ABP fund is not in the business of making promises for next year, but rather over a longer term investment horizon of 20 to 40 years or more.
“If we don’t allow risk, we don’t get returns,” he said during a head-to-head discussion with former Hermes Pensions Management chief executive Tony Watson.
Munsters added that ABP aims to provide “attractive pensions at an attractive price, and therefore needs to make attractive returns”.
He was also positive about long-term investment in alternative asset classes to generate attractive returns. The scheme’s commodities portfolio has increased by 28%, and the private equity portfolio - established in the early 1990s - is up 27%. However, Munsters added that you also have to allow them to be negative at times.
“You must have an opinion on where you want to invest in commodities. The reasoning behind having a portfolio, I think, is very important,” he said.
Munsters stated that Dutch schemes typically have a more diversified asset portfolio versus UK schemes, which traditionally allocated 70% to 80% to equity with “something of a home-country bias”. ABP has 36% invested in equities and 44% in bonds.
There were concerns from the floor about the mismatch between public and private sector pensions. While public sector funds like ABP can enjoy a long-term investment strategy, private sector pensions are battling because many employees change employers, reducing the investment horizon to between five and 10 years.
According to Munsters, this could be remedied by legislation to index the pensions of people who leave the scheme, and there could be portability for people to move from one pension provider to another. Government could also take greater care of pensions rather than just leaving them to the market.
In a discussion on corporate governance, both Munsters and Watson agreed that it added value. Munsters stated it was important to realize there was no single ‘recipe’ for good corporate governance - it differs from culture to culture, place to place and company to company.
He added that corporate governance was also regarded as something that needs to be shown.
“Corporate governance is in your own best interests as an investor. It is important to believe in it. It needs thorough thinking, and principles you are transparent about. This is not necessarily happening today, and that is a pity,” said Munsters.