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Impact Investing

IPE special report May 2018

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Dutch managers mark their patch

The investment management scene in the Netherlands could hardly appear more incongruous today against the gentle backdrop of the flat Dutch countryside.
In an institutional market, probably more competitively exposed than ever before, asset managers are busily re-shaping themselves and marking out future territory.
Significantly, a number of Dutch pensions issues are focusing investment minds going forward.
The forays of Dutch superfunds ABP and PGGM into the market to acquire De Nationale Investeringsbank (NIB) and Dutch private equity outfit Alpinvest as part of burgeoning investment management capabilities, have sparked discussion on the future strategy of these groups.
And the debate is being flavoured by the fact that 2001 heralds the first occasion on which companies legally bound to Dutch industry sector pension funds will have the possibility to opt out of their arrangements.
April 1998’s STAR agreement stipulates that should performance figures – to be published on a three year rolling basis, asset liability and cost issues not meet stipulated levels – then companies can move their funds elsewhere provided they offer a viable alternative.
While funds are prompted to carry out ALM studies, publish and be measured against them – encouraging accountability from schemes and an undoubted boom in work for consultants, some fund managers fear the regulations will foster a climate of defensive investment and augment the drift to indexation occuring amongst large to mid-size funds.
Next year will be the litmus test for STAR, however, although Marion Verheul, institutional account manager at Amsterdam-based Achmea Global Investors, managing Dfl120bn (E56bn) for Dutch institutions, via in-house managed investment funds, says some effects are filtering through.
“It hasn’t changed the strategies of industry schemes invested with us, except for one or two clients which feel they are at risk of losing some of their major funds.
“Our experience is, though, that the sector pension funds are a lot more dynamic than the company funds. Many company funds are reluctant to increase their share in equities above 15 to 20%, whereas the sector funds are at 40 to 50% in equities and real estate – which is quite surprising.”
A further topic of discussion concerns pension fund co-operation for both administration and investment management, with recent alliances such as the public transport pension fund with railways scheme Spoorweg seen as an precursor for increasing moves in this direction.
One manager comments: “They have the trump card – their boards know each other.”
Another suggests a further competition factor set to up the ante in the Netherlands: “Corporations are now looking to ensure the bottom line of the pension fund is strong because they do not want to put so much money in. As a result, they are introducing managers solely to get the best possible returns.”
Although equity portions continue to grow in Dutch institutions, which have traditionally been well diversified, many Dutch funds are still operating a ‘wait and see’ approach to the post-euro market. And the transition duration has surprised some managers. Roland Nagel, vice president, head of institutional sales at Amsterdam-based ABN Amro Asset Management – with e110bn of global assets under management – says there remains a significant domestic investment focus: “The shift has been slow, even amongst large funds.”
Hans Goosens, director of sales at Fidelity Investments in Amsterdam with Dutch assets of approximately e2.6bn under management of which e500m is through Fidelity’s Luxembourg funds, notes: “It might be that Dutch funds now consider Euroland as their home market which they think they should be doing internally but don’t have the skills yet. Maybe it’s a process of gradually creating these portfolios in-house.”
Goosens says Fidelity is also seeing significant interest in Japan with switches from indexed approaches into active portfolios.
The pace is set to quicken though, according to Jan daan Felderhoff, direction of client realtionship at Lombard Odier Institutional Asset Management in Amsterdam.
“On average 80% of Dutch pension fund money is now international. I believe the weighted average for funds is now approximately 45% in equities. In five years I see this rising to 60% and then up to the Anglo-Saxon level.
“Fixed income will only be in portfolios for diversification reasons and payment of short term pensions.
“In this respect we have become as impatient for returns as the Anglo-Saxons.”
Dutch euro pragmatism, alongside the more competitive pension fund environment, has continued contributing to the passive investment shift that has seen Barclays Global Investors (BGI) fill its boots in recent years.
Hilary Smith at BGI says the group grew by a further e20bn last year to e55bn in Dutch assets under management as medium size funds went core/satellite.
“This might be partly because of the STAR legislation and greater emphasis on performance benchmarks, but we are seeing more interest in direct or enhanced index approaches.” And she notes the dearth of indexation competition in the market. “There is State Street and possibly Vanguard. Deutsche through Bankers Trust could also target the passive market.”
Smith notes that the Dutch market opportunity for investment managers is sometimes overstated though:
“You have to understand the market. Of the Dfl800bn available, if you take out ABP, PGGM, Shell, Philips, Unilever, which are self-managed to a large extent, you remove a large chunk of the assets available. It is a good open market to do business in, but people need to look at what the opportunity costs are in the Netherlands.”
Gerard Roelofs, director Benelux at Deutsche Asset Management in Amsterdam, managing over e3bn in Dutch institutional assets, comments: “Deutsche is responding to growing demand for core/satellite approaches by developing passive/passive enhanced products.”
The indexation shift has meant greater focus on enhanced return possibilities in higher risk, higher reward securities. Consequently, niche players are setting up their stall for the game ahead.
European small and mid cap investment is picking up strong interest.
Evert Greup, managing director at Kempen &Co with assets under management of approximately e5.2bn, predominantly through speciality investment funds, says that since 1997, following the buy-out of a team in Edinburgh – Kempen Capital Management UK, the focus has been on the European small cap sector.
“18 of the top 20 Dutch pension funds use us either for mandates or speciality funds. We now have the largest small caps team in Europe with two and a half years of strong track record.
“The Dutch small caps portion used to be one third of the allocation two years ago. Now Dutch investors have their European exposure they are asking where they can add value and looking at European small caps, particularly as a result of last year’s outperformance.”
Greup says it is still a very under researched sector and has become a differentiation factor for the group. “We want to be good at a couple of specialities and be recognised for that. I don’t see we have any serious competition here in the Dutch market. Are the big institutions really doing this with a serious focus? I don’t think so. Probably two years down the road there will be a few other boutiques doing small caps.”
However, Felderhoff at Lombard Odier, argues against getting carried away with the core index/active satellite approach, noting that balanced is still the most common Dutch investment approach: “Balanced management fits the smaller and mid-size funds very well, because breaking up small pools of assets into core/satellite is not very efficient. It can be expensive to invest, divest and then change managers. The other question is, who then manages the managers – the consultants? And how good are they? Balanced managers can give good benchmark and asset allocation advice and for us, on average, the fees are 25 to 30bps.”
Frans van der Horst, a director at Aegon Asset Management in The Hague concurs: “I’m not sure if smaller players can be convinced of the argument, unless there is continued under-performance from active players. It is not a done deal that small funds will just go into indexing.”
Van der Horst says Aegon, with e10bn in institutional assets under management, is focusing on small to medium sized pension funds with the accent on balanced or enhanced active stances where the group typically looks to add 80-100 bps, depending on the strategic asset allocation.
“We have a strict business focus and the key going forward is efficiency, offering client specific mandates through pooled investment.”
Nevertheless, the healthy financial position of Dutch pension funds is prompting examination of new asset classes to help weather future downturns.
ABN Amro says it is introducing products such as derivative and behavioural finance structures to satiate demand. “We are taking a fund of funds approach to hedge funds for diversification reasons, which will start within the next month, although we already run some hedge fund portfolios. We will use an optimisation process to get a universe of relative value type of strategies and put these together in a multi-strategy environment.
“Long/short approaches are receiving a lot of interest if you bring them up with clients because of the alpha generating power in a market neutral fashion.”
Quirine Langeveld, director of institutional asset management at Paribas, Amsterdam, notes the group is in the pre-marketing stage for fund of hedge funds, where she senses ‘good appetite’. Erik van Dijk, CEO at Amsterdam based Palladyne Asset Managementwith e400m under management, says the interest in long/short strategies is almost as important as long only.
“We think this will continue. A lot of pension funds have somehow solved previous problems with the insurance chamber and are looking for the interesting returns and low correlations – independent of equity markets and interest rates – compared with long only strategies.”
For bonds, the post euro shift focus is now clearly on credits. Smith at BGI, however, says the pragmatic approach of Dutch investors, confronted with the need for a Euro-zone bond strategy and examining the new territory of credits, has brought some unexpected business. “A lot of clients came to us looking for index strategies for Eurozone fixed-income mandates, which was an entirely new business for us and we took about e5bn in new business last year for that alone.”
On the credits side, Nagel at ABN Amro says funds are generally sticking to investment grades, with the bigger schemes allocating portions to high yield. “I think this will be the next step and it could come quite soon. The credits trick is to diversify risk. If you’re looking for high yield at the moment you have to go to the US and hedge the currency risk.
“European credits are at a premium due to the scarcity. The other question is how much high yield is out there in Europe.”
Verheul at Achmea says clients are allocating around 3% overall in credits with around 5% of this in high yield.
While the credit issue is paramount in plan sponsors’ minds, Langeveld at Paribas says the effects may take time to filter down to asset managers: “We thought pension funds would have anticipated the credit issue earlier, but now they are definitely going for it.
“However, because most Dutch pension funds are managing fixed-income in-house we are not seeing that much outsourcing yet.”
Property allocation – traditionally a favourite for Dutch institutional portfolios – has certainly been eroded by the equity onslaught.
Nevertheless, Toine van der Stee, senior executive vice president at Robeco Institutional Asset Management in Rotterdam, points to its stability in portfolios – despite a period of underperformance against illustrious share returns: “I would expect a reappraisal in the next few years of real estate. If you look at Dutch institutions most still have 8 or 9% in real estate, which has fallen off slightly from 10-11% a few years ago, but it hasn’t dropped dramatically. Dutch institutions clearly want to invest there and the fundamental contribution to portfolios is still widely recognised.”
ABN Amro’s Nagel fears the property focus may have a limited shelf-life though: “Previously, investors reluctant to go equities were going to property, but I don’t see allocations rising above 10% again. I believe the future focus will be much more on alternative investment than real estate.”
The expanding market is undoubtedly upping the competition ante, both between established domestic players and the burgeoning number of foreign houses present in the Netherlands.
The insurance companies are adapting fast in order to retain and consolidate their traditional market segments. Verheul at Achmea says its pooled investment approach suits its target clients: “The advantage of funds is the ease of administration, good liquidity and for smaller pension funds they have a bigger spread because the investment is global. The funds have core managers investing 70-80% of the assets on a low risk basis, with satellite managers looking to higher risk for possible outperformance.”
And in such a competitive market, differentiation is being sought in client servicing and administration. Van der Horst, comments: “The best service and performance providers ultimately will win in this game. Investment managers which sit on their hands and don’t make the move now should not complain five years down the road.”
Adriaan Peijnenburg at the asset management department of ‘s-Hertogenbosch-based Van Lanschot Bankiers, soon to be renamed Van Lanschot Asset Management with around NLG13bn under management, extols the client relationship factor. “Everyone manages money but we can add value through personal contact. This is where we deviate from others, particularly for smaller pension funds.”
While Dutch investors are open for discussion with foreign managers, the large Dutch players are increasingly global – offering the full palate of products and targeting foreign markets.
Jan Lodewijk Roebroek executive director of institutional business at Fortis Investment Management in Utrecht says the core focus will remain Benelux and France, but expansion plans are afoot: “We now have the organisation in place to begin focusing on the non-core countries of the FIM group in Europe.”
Gerard Bergsma, director at ING Asset Management in the Hague currently managing e88bn for Dutch clients, which fully merged with Belgian bank BBL in January, points out that the group is now one of the top 20 managers in the world with its Europe, US and, Asia Pacific operations managing around e200bn globally.
The group is not shy about its expansion plans: “It’s obvious we want to become a European player and the BBL merger will help us to grow our business, especially our mutual funds business in key countries such as Spain, France and Italy.”
Goosens at Fidelity believes the right product can reap strong dividends in the tightly knit Dutch market: “The word spreads around quite quickly in this market and can help enormously. On the other hand, if you’re doing badly you can lose a lot of business.”
Quirine Langeveld at Paribas stresses the need for balance: “It helps if you have a local office and products that are rated with consultants. Of course, you also have to differentiate yourself in terms of track record and client servicing.”
Looking ahead, issues such as multi-manager structures and defined contribution (DC) pension arrangements – which are appearing amongst the smaller software and technology companies – will transform the market that little bit more.
However, van der Horst at Aegon predicts growth and liquidity in terms of mandates as the consultants come in recommending diverse investment strategies. “I’m not sure if that will be in three, five or eight years, but in 10 years I feel pretty safe that the market will be completely different. The lie of the land in the Netherlands is truly not yet set, I believe.”

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