In the flatlands of Groningen, the headquarters of Gasunie towers over the countryside, its irregular shapes capture the attention just as the ING headquarters in Amsterdam, designed by the same architects, does. Inside, the imagination is able to soar into the core of the building.
It houses the corporation formed by Shell and Exxon to buy and sell the natural gas produced in the Groningen gasfields.
In its heyday, Gasunie had over 2,000 employees, now the numbers are nearer 1,600, explains Cor Hendriks, who runs the DFl1.1bn (e500m) pension fund, with his team consisting of Hans Coenen and Robert Jan Tel. “As we are a small team doing the treasury management function for the corporate as well, we look at efficient ways to manage the portfolio.”
He adds: “For the Dutch equity portfolio, we believe we can beat the index over the longer term by active management. But for other countries, it is impossible for us to follow individual equities, there we buy the indices. So we devote considerable time to asset allocation. “For markets outside the Dutch we mainly use equity swaps, or we can use equity-linked notes, which is in the form of a bond, but is in fact a basket of equities.” Having decided on the current allocation – the tactical asset allocation gives wide ranges – the next question is the market, when invariably an index is bought. “For this we do not use the physical we use an instrument,” says Coenen.
The simplest swap the fund uses is the total return swap. “Under these we could end up obtaining say the return on the S&P 500, less 25 basis points,” Hendriks points out. “Normally what we do a lot of is not a total return swap, but a price one, in which case we do not obtain the dividends.” The return then is Libor minus an amount which reflects the dividend yield plus a risk premium.
But he adds it is possible to be “a bit smarter”, by using AAA-rated floating rate notes in the construct, instead of putting the nominal amount on a three-month deposit, and can beat the total S&P return by 2bps. Again by using other structures such as fixed rate bonds with triple A ratings and swapping them into floating by using currency and interest rate swaps, it may be possible to end up with an additional return of 15bps. “We think these are rather cost-effective structures and that the risks with the third or fourth structures are not that more significant than the first.”
Hendriks points out that they have been using this strategy for a number of years. “We do not see significant risks in such an approach, by putting the nominal amount in AAA-rated bonds and using AA-rated bonds on counterparts in the equity swap.”
But he stresses that in each case they look at the alternatives, particularly whether it might be better to use an indexed product. “Say we wanted to invest in Australia, where the market is not as liquid as others, then you could find the swap premiums are too high, then it might be best to use an indexed mutual fund. But you have to look at all aspects, including the transaction costs, to decide on the most cost-effective.”
Gasunie previously used external managers, but has stopped doing so after unacceptable results. “Now we run all our foreign equities portfolios in this way.” The structured arrangements vary from case to case, but average one to two years,” Robert Jan Tel says.
It is possible to unwind a swap when the fund wants, just as when selling a stock. “Before the big Far East crisis in 1997, we made a tactical shift to a lower range. We left Malaysia and Thailand in time, but we are still invested in Japan, Hong Kong and Australia.” Tel adds: “Of course, when markets are going down rapidly nothing is liquid anymore, so if you have to sell your futures or your equities, you have to pay enormous risk premiums.”
Coenen adds that the fund is very conservative in choosing counterparties, particularly with the problems in the banking system currently. “For swaps we select counterparts with good ratings, at least AA and we follow them intensively when there are any signs of trouble in the banking sector.”
Gasunie sees the comparative returns obtained by Dutch pension funds as being largely a measure of the extent of their equity exposure. “In 1997, we were pleased with our return because we beat our internal benchmark by 0.75%, and in 1998 the outperformance was a comfortable 2.8% over the internal benchmark, but it was not in the top 10 of Dutch funds. Our view is that our asset allocation and strategies are good for our fund and so we do not over-react to what others may be doing.”