The printing industry in the Netherlands, as elsewhere in Europe, is undergoing radical change. The demarcation line between journalists and print workers has become blurred with the widespread adoption of desktop publishing, while internet-based news services are competing with established print media for readers.
Pension funds for the printing industry sector are having to adapt to take account of these changes. Pensioenfonds voor de Grafische Bedrijven (PGB), the industry-wide pension fund for Holland’s printing and media sector for the past 50 years, has recently made substantial changes in the way it positions itself in the occupational pensions market.
In particular, it has transformed itself from a production and administration centre into a ‘knowledge centre’ and has moved to a more active management of its assets.
The PGB scheme has more than 50,000 employees belonging to 3,000 affiliated employers, 28,000 pensioners and more than 200,000 deferred pensioners. Its pension administration and asset management is handled by Grafische Bedrijfsfondsen (GBF), an organisation with offices on the outskirts of Amsterdam.
GBF currently manages pension assets totalling €10bn. It also provides services in other income-related products, such as early retirement (VUT) schemes, salary savings schemes and levensloop savings schemes
Paul Van Leeuwen, who took over as managing director of GBF at the beginning of 2004, says that for some years GBF had been punching below its weight. “With €10bn assets under management we are not the biggest pensions company in Holland but we’re certainly not the smallest. What we have done is move GBF to a position which reflects the size of the company.
“We have done that by asking ourselves a number of key questions. What is our core business? What are we good at? What do we want to do ourselves and what do we want to find partners for to provide the best price-quality ratio for our clients?”
Van Leeuwen decided that GBF needed to re-focus its activities. “We had to transform our company from one with a production and administration focus to one with a focus on operational excellence in the back office and customer intimacy in the front office,” he says.
This has involved operational changes. For example, GBF has promoted ‘customer intimacy’ by introducing a system of account managers. Every company in the PGB scheme with more than 100 employees is now allocated an account manager.
GBF has also sought to broaden the scope of its business and attract new clients by keeping its ‘price-quality’ ratio - the cost of servicing pension fund members - as low as possible.
It has had some success in this direction. In 2005 PCM, one of the largest newspaper publishers in the Dutch language region, moved its €500m pension fund, with 3,500 members to the PGB scheme. PCM, owned by UK venture capitalist Apax Partners, said that one of the reasons it had moved its scheme to GBF was the price-quality ratio that GBF offered.
“We have reduced the cost per participant from €80 three years ago to €63 currently,” says Van Leeuwen. Growing GBF’s business will reduce this further. “Looking ahead, we can see that scale is becoming an increasingly important issue. To be able to offer an attractive price-quality ratio in the future, we need to expand the scale of GBF.”
GBF has also linked conditional indexation against inflation to solvency coverage. Under a scheme introduced in 2005, It will pay 100% of indexation when the coverage ratio reaches 140%. Last year it achieved 137.7% coverage and paid 80%.
“We wanted to make the indexation policy and the premium policy more transparent,” says Van Leeuwen. “The level of indexation and the level of the premium [contribution] are both dependent on the coverage ratio. The combination of the premium and the indexation level requires a risk budgeting approach from an investment point of view. So the issue is how do we use our risk budget.”
Investment returns are equally important in attracting new clients, he says. Last year GBF returned 15.9%, 1% above the benchmark, and is on track to beat the benchmark this year.
In the longer term, Van Leeuwen is looking for structural outperformance of the benchmark, through absolute returns, something GBF has not achieved in the past.
“When I looked at the results we were producing it was my view that we had underperformed somewhat,” he says. “I felt we needed to move to a more active management of assets.” Last summer, Van Leeuwen recruited Dirk Wieman, a former deputy CIO at Fortis Investments Netherlands, as GBF’s director of investments to implement a more active investment strategy.
Wieman’s approach has been to promote an ‘open-ended’ in-house investment capability, so that GBF’s in-house investment department retains overall control of investments while being able to look outside for expertise in investment administration and asset management when this is necessary.
“We have chosen to be, so to speak, the spider in the web. We need the knowledge to be able to manage the investments for our clients,” says Wieman. “But that is not to say that we necessarily have to do everything ourselves.”
Last October, GBF announced that it was outsourcing its investment administration to KAS Bank. The arrangement gives GBF access to KAS Bank’s systems and infrastructure, so that it can execute its portfolio management including performance measurement and risk management.
“One of the core activities of GBF, besides having a very flexible and up-to-date administration system, is having a good investment department, because the yield of the investment portfolio is important for the financial strength of the pension fund.
This matters to PGB participants, Wieman says. “People in the media and printing business are a little bit older than the people in industry generally, so investment performance is important to them.
“We needed to implement a better administration for our investment department. We saw that, with a limited number of people, we were quite vulnerable. Administration is not our core business.”
Kas Bank is also looking after GBF’s levensloop, or ‘life course’, assets. Levensloop is a tax-friendly savings scheme, that allows employees to save for unpaid leave, including early retirement.
“We are looking from a commercial point of view at how levensloop is developing. So far we have seen that there is not very much interest in the product. However, we do see possibilities in the near future since the social partners have agreed that when the premium for the VUT - the pre-pension arrangement - ends, it will be put in levensloop.”
There are also signs that the government wants to combine the Spaarloon system with levensloop When that happens, resistance to levensloop will disapper. So we have high hopes that the prospects for levensloop will be better than they have been in the past few years.”
The arrangement with Kas Bank is open-ended. Currently GBF is applying for a licence for the management of investment funds with the Authority Financial Markets (AFM). Once the AFM has granted the licence, KAS Bank will transfer the levensloop assets back to GBF.
The aim, he says, is to become a knowledge centre. “If we want to be a knowledge centre, we need to have to have qualified people on board,” he says.
This has meant strengthening the investment department, more than doubling its size from four to nine people. he says. The investment team covers three main asset classes of the investment portfolio: real restate, fixed income and equities.
GBF has moved from a direct investment in a portfolio of Dutch property to indirect investment in global. The real estate portfolio is now made up of quoted real estate companies and unquoted participation funds investing in residential, industrial and commercial property development. “We decided it would be better if we moved away from bricks and mortar and also diversified our investment into other countries and regions worldwide,” says Wieman. “We already invest in the Far East and are looking to expand a little in the US real estate market.”
The fixed-income portfolio is also diversified. “We have a broad portfolio which contains not only government bonds but European and US credits. We have also allocated some money to high yield and emerging market debt.
“The investment team uses credit default swaps (CDS) to gain greater exposure to the credit market, particularly high yield. There are different ways to cover high yield. We can buy derivatives, which gives us access to the broader index. The same is true with credits. We can buy CDS of triple B or single A.”
Most non-European fixed income exposure is currency hedged, he says. “The strategy at GBF is that we should hedge at least 90% of non-euro assets back to euros, so the investment department runs a large currency hedging programme.”
GBF also uses derivatives to hedge against interest rate risk. “In the current interest rate environment, the yield from bonds is not enough to fulfill our goal. You must have other assets working for you. Hedging some portion of interest rate risk through interest rate derivatives allows us to have more equity and real estate in the portfolio than would otherwise be the case.”
GBF is also big enough to be able to buy structured products from international investment banks, either off the shelf or made to measure. “We do a lot of investment in structured finance, whether this is CDOs [collateralised debt obligations] or special notes which combine fixed
income and equity,” Wieman says.
The search for yield outside the bond portfolio means there is also some space in the portfolio for alternative investments such as commodities. Yet there is currently no exposure to private equity and hedge funds, since both are the subject of hot debate in the Netherlands, says Wieman.
“You can never say never, but we understand the delicacy of current discussions about the activities of private equity firms and hedge funds, and we must be sure that when we put some money to work in these fields that the pension fund board and its participants accept the case for them.”
The role of equities in the portfolio is crucial, says Wieman. “Equities are by far the biggest driver of risk/return.” A central plank of GBF’s strategy is structural outperformance of PGB’s equity portfolio relative to its benchmark, in order to keep PGB contributions low.
To help it achieve this, GBF has outsourced the management of around 90% of the PGB equity portfolio, equivalent to €3.6bn, to 12 specialised external managers in 16 mandates.
Wieman says the decision to outsource most of the equities portfolio was driven by an acknowledgement that GBF’s in-house investment team could not be expected to find alpha across the global equity portfolio “We know the Dutch equity markets and we know a lot about the European equity market, but as for in depth knowledge of the US or Japanese markets, that’s something entirely different. That’s why we took the path of hiring alpha generating equity managers from outside.”
International managers are well represented. The 16 mandates include the award of a €460m US enhanced equity mandate to Intech, a subsidiary of Janus Capital Group that uses mathematical investing, and a €240m Europe ex UK quantitative equity mandate to Goldman Sachs Asset Management. “The philosophy behind the selection of these managers is that we want to have plenty of diversification in investment style,” says Wieman.
GBF decided to manage the remaining 10% of its equities portfolio internally. “As the spider in the web, we could not give all our equity mandates to external managers,” says Wieman. “We felt we must also have some in-house knowledge of running an equities portfolio so that we could talk to the external managers on equal terms. So we created our own Europe ex-UK equity portfolio, because that’s where we have the most know-how.
GBF also retains responsibility for tactical asset allocation. “If we want to overweight or underweight, then that is our decision. We can do this through futures or changes in regional or country allocation.”
Perhaps the most innovative move, however, has been GBF’s decision to insource the know-how it needs to manage its multi-manager strategy. In December it appointed Altis Investment Management as a multi-managers adviser to the GBF equity portfolio.
Altis’s principal task is to monitor the performance of the 12 external managers, says Wieman. “Because you have so many external managers working for you, you must have a good view of what they are doing and a good feel for how they are doing,” he says.
Daily monitoring of managers can flag up ‘style drift’ before it becomes a problem. “The Altis system allows us to do a highly detailed analysis of where their results are coming from. When we select a manager because of their expertise in small caps we want to be sure that the results are coming from that and not from large caps.”
Altis is also providing aggregated risk management and advice on new manager selection. “If you make manager changes you must have alternatives,” says Wieman. “The Altis database will enable us to quickly draw up a long list and a short list.”
The choice of Kas Bank was helped by the fact that it is already GBF’s custodian bank. “It helps having one custodian, so that all the external managers have their equities and securities at Kas Bank. So we have a line by line insight into how portfolios build up. If you had five or six custodians it would be much more difficult.”
The chief benefit of insourcing is that it allows GBF to remain in day to day control of their assets. “We remain at the steering wheel,” says Wieman. And that is where GBF wants to stay.