Mark Burbach, the chief investment officer of Blue Sky Group, tells Brendan Maton how it is coping with increased investment regulations
At a glance
• The regulator (DNB) is determined to promote the consolidation of Netherland’s national pensions industry.
• Mark Burbach, chief investment officer of the Blue Sky Group, is critical of this approach.
• Blue Sky retains a buy-and-hold ethos.
• The development of illiquid premia investing is one of Burbach’s proudest achievements at Blue Sky.
Pension funds have the potential to exist for over a century; in the sphere of human activity perhaps only nuclear rods have a longer half-life. And yet, since 2000, the majority of regulation has forced pension fund managers to focus on the short term: to be prepared for capital market squalls as if a wave of volatility could capsize a fund and damage it forever.
Nowhere has the regulatory mood changed more than in the Netherlands. The regulator (DNB) is determined to oversee a smaller, but more robust fleet of all-weather vessels to survive future storms.
Mark Burbach, chief investment officer of fiduciary manager, Blue Sky Group, believes this approach is forcing trustees to behave more like insurers. They are so constrained by the need to protect themselves against market volatility that they cannot take advantage of sudden opportunities or venture into new waters.
“The trustees [of our pension fund clients] are more worried about the running yield on their assets than hedging interest or inflation risk,” he says. “They are entrepreneurial but all the regulations nowadays mean that by the time you have changed policy to take advantage of cheap assets, it’s too late.”
The European Market Infrastructure Regulation (EMIR) is just one set of rules Burbach sees as slowing Blue Sky Group and its clients down. “Until EMIR, we had asymmetric swap contracts with our banks. We pledged bonds but gave no cash collateral. The terms were better than under central clearing – the keystone of the new regulations – which our clients didn’t need.”
Where did we go wrong?
Instead, EMIR has increased costs for Blue Sky Group and many European pension funds. Part of the cost results from increased personnel overseeing the treasury function as more collateral gets pumped around to meet the regulations. Burbach understands why – he took up the post as chief investment officer in February 2009 when trust between players in the capital markets was still weak. Eight years on, however, his frustration is that pension funds are forced to act because of the mistakes of other types of financial institution and – more broadly – that regulation in the Netherlands appears to be promoting more risk-averse and bureaucratic behaviour– driving pension funds to be like insurers – when the country has the best pension coverage in the world. “We have assets worth nearly two times GDP – this should count for more in terms of risk scoring.”
Alas, life is not simple. How the Netherlands generates money and where its pension liabilities lie do not overlap. Blue Sky’s biggest client, for example, is the pension fund for the pilots of the national airline, KLM. The sponsor and fund are in dispute over how pension rights carry inflation protection, with KLM claiming its ongoing operations would be damaged by the cost of linking pilots’ benefits to real prices.
Such battles, with the threat of cuts to pension rights and even closure, indicate that however great Dutch pension assets may be, employers and sponsors want to reduce liabilities.
Look around, see what you do
So how does an intermediary like Blue Sky Group – which manages €20bn on behalf of seven pension funds with over 100,000 members – fit in? (Blue Sky has nine asset management clients and a pensions administration division). Burbach is confident that the basic inflation and interest rate risks are taken care of, notwithstanding the legal arguments of client and sponsor. For a long time, Blue Sky Group has held long-maturity euro-denominated government debt and swaps. This foundation explains why the trustees can embrace their entrepreneurial spirit.
When Burbach joined Blue Sky eight years ago, much of its holdings were passive. He emphasises that passive does not here mean linked to any investable index benchmark; rather, they were long-term buy-and-holds, in bonds as well as equities and real estate.
Much of this ethos persists. However, Blue Sky Group has evolved so that it has the competence to diversify into more liquid and illiquid strategies. “At the holistic, strategic level, we are firm believers in diversification,” says the chief investment officer. “It’s hard to know where best to put your money over one, three or five years. Our investment principles do not change, but the economic environment is constantly changing. Although, extremely low interest rates pushed coverage ratios to levels near or just below 100%, we kept searching for higher returns generating assets.”
He says this volatility is a consequence of the risk management, set in motion by the shock of the great financial crisis, which Burbach calls “crisis thinking”. The problem with this mentality is that it imposes similar behaviour on so many types of financial institution that variety itself is put in jeopardy. There is implicit concern from Burbach that “crisis thinking” needs a replacement (Blue Sky’s chief executive officer, Toine van der Stee, says the Netherlands is losing talented individuals in finance because of the regulations that oust investing creativity and domestic salary caps imposed on banks).
In the meantime, in an environment predicated on fear, diversification is not merely a pleasant extra but a survival essential.
And so, in fixed income Blue Sky Group has diversified into highly rated, long-term debt through Dutch residential mortgages, credit, emerging market debt, high yield and leveraged loans. Commenting on the final two categories, Burbach points to the renaissance of the US energy sector in 2016 as an example of why it is foolish to accurately “call” short-term markets. “We try to hire specialist managers for their selection skills within niche portfolios.”
Within equity, Blue Sky Group has always preferred quantitative strategies. This reflects the analysis undertaken by its researcher, Ramon Tol. Currently, the fiduciary manager has several mandates with external houses, including Tobam and INTECH, which rely on quant formulae. Tol describes factor investing as “Return of the Jedi Quants”.
His preferences reflect the personnel constraints of Blue Sky Group’s early years. During its first decade, there were only three people responsible for manager selection. No wonder that when Tol – as one of that trio – decided to build his own database of managers, he felt comfortable analysing the numbers supplied by quants rather than the investment stories given by fundamental managers.
Now there are a dozen employees responsible for external manager selection. This expansion in search power has enabled Blue Sky to investigate alternatives such as private equity, to which it first committed five years ago. Values then were low owing to the crisis and although it remains a niche in terms of money invested, Burbach is confident that the in-house team can find good managers and hence decent returns. There are as yet no direct holdings, but the fiduciary manager has moved from funds-of-funds to managed accounts and co-investments.
“We have assets worth nearly two times GDP – this should count for more in terms of risk scoring”
Blue Sky’s real estate strategy has followed a similar path. Over 10 years ago, it was indexed in Europe as a straightforward means of having exposure while waiting to gain understanding and confidence in other styles and active managers. Geographic exposure widened while a preference for unlisted investments emerged. Three years ago, the split was 50% listed/50% unlisted. Now the portfolio is closer to 20% listed/80% unlisted. “Open-ended unlisted vehicles with a good running yield are relatively easy to trade and our favourite at the moment,” he says.
Burbach also highlights a growing interest in private equity real estate, which started in the Netherlands via Altera and has now spread across the world.
When talking globally, Blue Sky classifies the world into four regions: North America, Europe, Asia and emerging markets. These are most relevant to risky assets (in fixed income there remains a domestic bias, for the currency and latterly because of the considerable exposure – almost 10% of the bond allocation – to Dutch residential mortgages). The sequence of diversifying around the world is not, however, routine. In private equity, for example, the first investments were made in Asia in 2012.
The development of the illiquid premia investing is one of Burbach’s proudest achievements at Blue Sky. He is confident that it benefits clients and exposure to these assets will grow.
Otherwise, he is proud of how the fiduciary manager has built up its client relationship team to communicate the evolution to trustees. He says the organisation better understands the needs of trustees while providing transparent insights for their greater confidence and trust in what Blue Sky does. The result? Greater receptivity to new ideas.
Any new ideas in investments will happen, however, without Burbach. After eight years in the role, he is leaving Blue Sky Group for a new, but unnamed, opportunity as a chief investment officer in the Middle East.
Pensions In The Netherlands: A Gordian knot of reform
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Interview: Mark Burbach - Blue Sky Group