Pensioenfonds Verloskundigen, the €395m Dutch pension fund for midwives, has yet to find an alternative for its investments in commodities, an asset class it last year decided to exit.

After a thorough analysis the fund has concluded that inflation-linked bonds are not suitable as a replacement, said the fund’s president Marlies Bartels. The Verloskundigen fund has not yet sold the commodity investments, which amount to a 4.2% allocation.

The poor returns on commodity investments in recent years were a major driver for the divestment decision in 2020.

In 2020 the asset class returned -16%, according to the pension fund’s annual report for the year. This is better than the -26.5% of the Bloomberg Commodity Total Return Index, but the fund was not happy with returns in previous years either.

The pension fund invests in commodities through a commodity fund of its fiduciary manager Achmea Investment Management. It has a 32% exposure to metals, 32% to energy, 23% to grains, 7% to other soft commodities and 6% to livestock.

Criticism of the pension fund’s investments in oil and gas, combined with doubts about the diversification benefits, also contributed to the decision to divest from commodities.

The pension fund’s board has noted that an increasing number of members want to invest less in oil and gas, according to Bartels.

“This has transpired from surveys among members as well as from conversations with members about sustainable investing,” she said. “Recently, we received a message from a group of members via social media calling on us to divest from fossil fuels.”

“Compared to other asset classes, we did not believe linkers were sufficiently attractive because prospective returns are low”

Marlies Bartels, president of Pensioenfonds Verloskundigen

The fund considered swapping commodities for inflation-linked bonds, even though the risk profile of the two asset classes is very different and inflation protection is not a must for Verloskundigen.

“Our pensions are indexed annually anyway, this is financed from the pension contributions,” said Bartels. “The most important function of inflation-linked bonds would therefore be their diversifying characteristics.”

Eventually, the pension fund decided against investing in inflation-linked bonds, which its fiduciary manager had advised it to include in the return portfolio, because it deemed the instrument unsuitable for interest rate hedging purposes.

“Compared to other asset classes, we did not believe linkers were sufficiently attractive because prospective returns are low,” said Bartels.

The pension fund of DNB, the Dutch central bank and pension regulator, recently decided to include inflation-linked bonds in its matching portfolio.

Maybe infrastructure, but no rush

The midwives fund now has its eyes on infrastructure as an alternative for its commodities portfolio.

“We are still researching the topic,” said Bartels. “Possibly infrastructure is a good alternative, but it is very illiquid. As we are currently also approaching the switch to a new pension system [in the Netherlands] we do not want to invest too much in illiquid assets at the moment.”

Verloskundigen’s difficulties in finding an alternative for commodities have proved a blessing in disguise, as fortunes have reversed for commodity investors this year.

Achmea IM’s commodity fund made a return of 23.5% in the first half of 2021. “We are not in a hurry to divest, given the current returns,” said Bartels. “But from an ESG point of view we will continue on the path we have chosen.”

She emphasised the sale of its commodity investments does not imply a divestment from fossil fuels. “We have no plans to sell stocks and bonds of oil and gas companies in our portfolios,” said Bartels.

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