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Dutch funds mix euro-caution with adventure

The Dutch investment market appears to be shifting towards the euro along two different tracks, with many of the country's larger and more externally focused funds noticeably shifting assets to eurozone countries in a bid to profit from European convergence. Smaller funds, meanwhile, are adopting a more gradual, risk-conscious 'wait-and-see' approach to post-euro investment.

Jan Willem Baan, chief investment officer of TPG KPN, the pension fund for the postal and telecom industries, managing around Dfl11bn ($6bn) in assets, explains that the fund's asset allocation strategy began changing as early as the end of 1997 in preparation for the euro.

The single currency transition itself, Baan says, will be more of a managerial shift in operations than an investment change, with euro-expectant asset allocation strategies already well in place.

On the fixed income side, representing 40% of TPG KPN's investments, Baan points out the shift from 80% investment in Dutch and German bonds to a predominately more Europe-wide portfolio, as the precursor to complete euro investment next year.

We are now very much 'euro' minded in our fixed income outlook, and by January 1, 1999 will move to a euro portfolio. Our philosophy certainly follows the idea of one currency, one big capital market."

For equities TPG KPN has already adopted an externally managed pan-European approach for its portfolio, covering the euro 'in' countries, Switzerland and Sweden, but excluding the UK.

In global terms the fund is around 10% overweight in Europe compared to its world benchmark. Baan explains this as part of TPG KPN's strategy of internationally orientated equity portfolios, which very much reflects the top end of the Dutch market as a whole as it prepares for Emu.

"Dutch funds are well prepared for the euro and seem to have a head start on the industry as a whole. Investment strategies are very European minded already and the movement away from the relatively small Dutch market is happening quickly as investors realise the opportunities available in the euro market," he says.

The major trend towards sectoral asset allocation for equities by larger Dutch funds since the beginning of the year is undoubtedly a direct result of the euro, according to Erik Van Dijk at Amsterdam-based Palladyne Asset Management, part of UAM. With the single currency eliminating the currency risk that had kept Dutch investors in the domestic market, the door is now open for the sector approach previously favoured but not so often executed by funds. "There are now no pension funds interested in specialist Dutch equity mandates, everything has been transferred into European portfolios," he points out.

As a result, the equity market is catching up with its bond counterpart, which has this year been extending an already developed international shift, particularly into German gilts, in preparation for the euro.

However, despite Dutch readiness for the single currency, there are two important issues provoking a great deal of cautionary discussion amongst investors.

The first is whether a euroland portfolio definition should include the UK and Switzerland. Van Rijk believes around 80% of pension funds will go for the euro 15 approach, realising the inherent inefficiency in having specialist mandates for the 'out' countries.

More important though is the question currently doing the rounds in Dutch funds, of what is to be done with the small caps. With euroland set to become the home country for the sake of asset liability studies, domestic small caps managers are expected to move into their euro equivalent. The inherent worry, according to Van Rijk, is that they may not have the knowledge to do so succesfully.

Contrarily, any move by funds to a broader investment strategy in larger stocks it is feared could also entail greater risks, due to the correlation between these stocks and the markets of Asia and the US.

"The problem until now has been a lack of specialised European small caps managers, and with the increasing demand for small caps as possibly the best low risk diversity for investors, this could cause problems. Consultant help can be enlisted, but Dutch investors are really clamouring for more information on what will be the new 'ball game' in European small caps," Van Rijk explains.

Stefan de Maar, equity portfolio manager at Detam Pensioen Services which manages the pension fund for the Utrecht-based Dutch retail industry employees, says the last nine months have seen a gradual reduction of the fund's overweight position in the Netherlands in favour of European equity investment.

"Historically the overweight position in Dutch equity has been partly caused by sentimental factors as well as the fact that our liabilities are also in Dutch guilders. As a result, we made the first step towards transforming our asset allocation in preparation for the euro by moving from Dutch government bonds to Dutch equity, because moving straight into international equity would have been too great a step for our clients," de Maar says.

He cites the main reasons for the equity shift though as diversification and the growing equity culture outside the country that makes such a move possible.

On the bond side, he says, the restructuring process towards European bonds which had already been under way for two years, has undoubtedly accelerated, with investment in all Emu countries except Denmark. And from next year he expects this expansion to begin moving further outside the eurozone in pursuit of diversification, convergence and higher yields.

"I think the shift into euro-denominated asset allocations will almost certainly at a later stage give rise to investment mangers beginning to seek new diversification opportunities outside euroland. We are also expecting Emu to lead to a correlation between euro bond and equity markets and believe we will see an influx of foreign investors into what will be an attractive market," de Maar adds.

Such activity in the market, alongside greater attention to shareholder value, should be extremely healthy for funds, he points out.

A a result he predicts an even more marked shift to euroland from the Netherlands by Dutch investors in the coming months.

However, Bert Tibben, head of equity and bond investment at Rotterdam-based transport group Nedlloyd's pension fund, which has around NLG3bn in assets, says that as a smaller fund Nedlloyd is erring on the side of euro caution.

"We are carrying out a very slow move to European equities, but nothing drastic enough to significantly change our current investment structure. We just feel there is little point in acting before the fact and will wait and see what the invest opportunities of the eurozone are when they actually happen," he says.

The fund has an equity portfolio weighted at 50% in the Netherlands, 17% in Europe and 17% in the US with the remainder in the Far East. Similarly, the fund's bond portfolio is still heavily Dutch weighted at 95% with 5% in global paper.

"We just feel it is too difficult to predict the outcome of Emu, with so much depending on governments and the state of the financial markets, and I think our caution here is justified, particularly in light of the present crisis," he explains.

Nedlloyd is seriously analysing the future euro scenario, including examining the possibility of euro 'out' country investment for diversification purposes. This approach, Tibben believes, is typical of the norm within smaller Dutch funds unable to bear the risk of any rash euro movement.

"The larger funds are undoubtedly shifting to eurozone, though, to take advantage of the convergence phenomenon, particularly to Italian and Spanish investment from what I have seen. So in the Netherlands there is definitely two differently paced streams of traffic heading into euroland at the moment.""

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