Dutch pension-fund 'herding' threatens financial stability, DNB warns

Dutch pension funds exhibit herding behaviour in their investment policies, which could pose a danger for financial stability, according to research conducted by regulator DNB.

The Dutch financial news daily Het Financieele Dagblad, quoting from a survey to be published in ESB, a magazine for economists, said “aping behaviour” was the most obvious example of herding.

Four DNB researchers, who analysed the monthly trading data of 39 pension funds between 2009 and 2016, found several signs that the schemes had emulated similar-sized schemes or the three largest Dutch pension funds – ABP (€359bn), PFZW (€172bn) and PMT (€63bn).

They said this was a problem, “as pension funds ignored their own data, which leads to markets working inefficiently”.

They also noted that pension funds responded in a similar ways to changes in legislation, said Het Financieele Dagblad.

For example, the researchers found that Dutch schemes began hedging the interest risk on their liabilities through interest swaps after legislation changed in 2007 and the pensions system became increasingly susceptible to interest-rate movements.

Further, pension funds tended to re-balance their investment portfolios in a similar way in the wake of market movements.

Dutch pension funds in general use quite narrow bandwidths in their strategic investment policies, which requires them to re-balance continuously.

If they achieve a significant return on their equity holdings, for example, they need to divest stock to prevent an overweighting in their asset mix.

In the opinion of the DNB’s researchers, however, this kind of herd behaviour is actually positive “because it increases stability, as it counters cyclical price movements”.

Dutch pension funds, with combined assets of more than €1.3trn, comprise a substantial part of global pension assets worth more than €26trn.

Because they have evolved to become major players on the financial markets, the focus on their investment behaviour has grown.

Dutch schemes investing or selling the same assets at the same time could exacerbate market volatility, according to the DNB’s researchers.