It has been three years since the Enron scandal shocked investors the world over. The demise of the Texas-based energy trader proved to be the mere tip of the iceberg. Tyco, WorldCom, Wall Street’s biggest investment banks and star-analysts deceiving the public, the spectacular collapse of accountancy giant Arthur Andersen and last year’s accounting scandals at Parmalat – the list seems to be endless.
What impact did these scandals have on pension funds in the Netherlands? Have they changed the way they manage their investment research processes?
The fallout from the collapse in 2001 of Enron was huge. The company soon became synonymous with corporate misgovernance and greed, leaving behind $15bn (e13bn) of debts. Millions of investors lost out when its shares became worthless, and 20,000
people ended up losing their jobs. Several Merrill Lynch bankers were charged with fraud in connection with Enron transactions and Arthur Andersen, which failed to audit the Enron books correctly, collapsed.

As a result, countries on both sides of the Atlantic implemented corporate governance and accounting reforms. For example, the
Sarbanes-Oxley Act in the US brought in strict penalties for
violations of US securities laws. In the UK, the Department of Trade and Industry introduced new
regulations for the accounting industry and in the Netherlands, a new corporate governance code – nicknamed Tabaksblat – came into force earlier this year.
In the global market downturn, ABP (the Civil Service Fund) in the Netherlands decided that it was time for a radical rethink of its investment research process. ABP is the pension fund for some 2.4m employers and employees of the Dutch government and the
educational sector.
With invested capital of e158bn, ABP ranks in the top five of the world’s biggest pension funds. A statement on the fund’s website reads: “In order to remain in a position to pay the pensions, the fund needs a return on investments from year to year that is on average 7% and therefore 2%-3% higher than the return on government bonds. The pursuit of higher returns entails more risks. By means of a wide spread of the investments and an alert investment policy we seek to restrict these risks.”
Erna Boogaard, fund manager at ABP Investments, managing a
portfolio worth about e10bn, says the pension fund “took a new road” in 2002 in the way it conducts its investment research. “ABP decided to no longer invest purely on a quantitative basis,” she says. “Before I arrived in 2001, ABP’s investment process was mainly based on building quantitative models, without really looking at how companies were being run.”
In 2002, ABP launched a new team solely responsible for the fund’s in-house research. “A change of strategy was needed to make sure we would be able to keep on delivering the same yield,
particularly given the tough stock market climate,” says Boogaard.
The 13-strong team at ABP takes an in-depth view of a sector before it decides to commit investments to it. “Let’s say we want to invest in a stock in the consumer goods sector,” says Boogaard. “First, we speak to the experts. Then we look at the bigger picture. For example, how the economy is doing, how consumers are expected to behave, who the company’s main competitors are, and how the company is managed financially.”
ABP’s investment portfolio is “fairly concentrated”, she adds. “Any position we take up will be big. That means we need to spread the risk as much as possible. One way of doing that is to leave nothing to chance and do as much research as possible before we make any decision to invest.”
At SFB Asset Management, a spokesman says the financial scandals have “hardly had an impact” on the way the group conducts its investment research. “We do look at investment research from several players, but it is not a decisive factor in our decision to invest in a fund, so therefore we have not really changed our policy.”
Following the corporate scandals in the US, the role of supposedly independent analysts and their research came under intense scrutiny. The bull market in the 1990s prompted a whole range of new companies to go to market, fuelling a strong rise in demand for “expert advice”.
The problem with research from investment banks, however, is that it is feared analysts might issue strong buy recommendations in the hope of generating more business for the bank from the company whose shares they recommend. And let’s not forget the emergence of so-called star analysts – the experts who became so famous that their recommendations could persuade thousands of investors to invest in a particular stock, sometimes with disastrous consequences.
In the aftermath of the corporate scandals, when some star analysts landed in jail, how does ABP handle investment research from big brokers, such as banks? When ABP’s in-house team wants to invest in a certain stock, it will talk to as many experts as possible, stresses Boogaard. “These include external advisers at the large consultancies; sector specialists, who can give an independent view; the company’s main competitors and also analysts from the big banks.”
“We speak to analysts to get a better picture of a sector we want to invest in. Sometimes they follow a sector very closely that we do not know a lot about. But we do not ask them for a recommendation on a stock, because we know there are alternative motives for them at play.”
Ellen Habermehl, a spokesman for PGGM in the Netherlands, says there is “growing appreciation” for more independent investment research. PGGM looks after the pensions of 1.8m health care and social workers in the Netherlands. Its total pension capital amounts to about e55bn, which includes pension contributions and investment returns.
The fund spreads its investments – both in the Netherlands and globally – across equities, fixed-interest securities, real estate, private equity and commodities. PGGM’s objective is to “pursue an active investment policy designed to achieve as high a return as possible within a set risk framework.”
Although PGGM would like to use more independent investement research, it is not exactly “widely available”, says Habermehl. “Brokers offer investment research as part of a total package of services for which you pay a fee. There is, however, not a lot of movement towards separating research from other activities. So, as a customer you are almost obliged to buy the entire package the broker offers you, which makes it less interesting to buy independent research on top of that,” she says.

Financiele Diensten
Amsterdam (FDA) has offered independent investment research not linked to brokerage services since 1986. “We are the only party offering truly independent investment research,” says Jan van der Meulen, the company’s general director and founder. He says there has been a “growing interest” in independent investment research in the aftermath of the corporate scandals, particularly from the Anglo-Saxon world. “We have recently had some interest from a number of parties in London.”
He adds: “All over Europe, investors realise that independence and transparency are very important elements when it comes to investment research. One of our main selling points is that
we provide research only, and do not execute the actual stock transactions.
“Second, all of our analysts are prohibited from owning shares in companies they look at. If they do, they will be sacked. Compare that with most banks, where analysts are allowed to own shares as long as they tell the compliance officer.”

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