How seven European pension funds view active management

Bayer-Pensionskasse: Simple general philosophy

Bayer-Pensionskasse has “a very simple general philosophy”, says Stefan Nellshen, chief executive and chief investment officer of the company pension funds for the German life sciences firm.

“We don’t believe that you can achieve systematic outperformance by active management in deep and liquid markets over longer periods of time,” Nellshen explains. “This is why we prefer to invest passively in these markets.”

He cites an example: “We do not believe, and our individual experience confirms this, that active managers can beat the S&P500 systematically and consistently over a longer period of time.”

As a consequence of this philosophy, Bayer only employs an active approach in terms of corporate bonds, small-cap equities and emerging markets debt – and only investing into hard currency for the latter.

In addition, the funds actively manage their own real estate investments as well as infrastructure, private equity and high-yield bonds, Nellshen says. 

Almost half of Bayer’s assets are invested in German-registered bonds, again a part of the portfolio that the funds manage actively internally. “We buy each bond ourselves and have a clear buy-and-hold strategy,” he adds.

Nellshen and his team are also responsible for Bayer’s international defined benefit pension plans globally, especially in the US, the UK and Switzerland. The structure of the international funds with minimum benefit guarantees is slightly different but, as Nellshen stresses, the investment philosophy is strictly asset liability management (ALM)-driven following the same methodology for all of them. The German pension funds constitute roughly three-quarters of the total assets under management (AUM) globally (German and international pension plans combined). 

“We have been following this ALM-based investment approach more or less consistently over more than 20 years,” Nellshen says. “We try to optimise the probability for being ‘sufficiently’ funded over a longer future time horizon by defining the weights of the different asset classes within the portfolio of the respective pension fund. 

“When a new ALM assessment is done, these weights are adjusted accordingly. You could say it is more an evolutionary approach, but the basis remains the same – passive in liquid markets and active for the rest,” he adds.

While Bayer’s investment philosophy has remained consistent for roughly two decades, the weights between asset classes have changed over time, Nellshen continues. 

“You could say the changes have been evolutionary,” he says. “The last major ‘trend’ was really after the Global Financial Crisis in 2008 when market interest rates fell. Since we have to deal with defined benefit obligations where we need a certain return to be able to finance guaranteed pensions, we had to look for alternatives to bonds and shifted slightly towards equities and other higher-yielding asset classes at that time.”

But as interest rates have risen, Bayer is again examining what the optimal weights of various asset classes are that could lead to decreasing the proportion of riskier asset classes in favour of fixed income. 

“If the current geopolitical environment, with trade and conventional wars on the increase, leads to increased volatility, then this may have an impact also on the long-term average return expectations and volatility assumptions for different asset classes,” Nellshen says.

Bayerische Versorgungs-kammer (BVK): Long-term, safety-oriented investor

For Bayerische Versorgungskammer (BVK), active management plays a deliberate and targeted role in its portfolio construction, says Hendrik Kott, head of equity and alternative investments.

“We are a long-term, safety-oriented investor, and therefore our objective is not short-term outperformance, but sustainable returns aligned with our long-term liability,” Kott says.

BVK employs active management in markets, “where we believe that deep local insights and rigid risk management can generate revenue above the benchmark”, he adds. 

This policy currently includes emerging markets, high-yield credit, small-cap equities and complex private market strategies. “For example, we invest in infrastructure, real estate, timber and private equities using an active approach,” Kott says. “In these segments, market inefficiencies are more pronounced, and we see tenable opportunities to capture alpha through manager skills and proprietary insights.”

Kott notes that, historically, institutional portfolios, including BVK’s, were managed actively across the board. However, with the evolution of market structures, improved data analysis and the growing availability of robust investment opportunities in index funds or exchange-traded funds (ETFs), the fund has refined its approach and built up more of a core satellite portfolio. 

“We now use an active strategy with much greater precision, focusing on areas where we have a high conviction that active management can add value to the portfolio and to our pension group members,” Kott says. “Using active management also gives us the opportunity to use our voting rights and to have a dialogue with companies about their ESG policies as sustainability is at the core of our investment philosophy.”

More than half of BVK’s portfolio is managed by external partners. A large portion of the fixed-income portfolio is managed internally along with part of the real-estate portfolio. “We have built up roughly 100 active partnerships worldwide,” adds Kott.

BVK uses passive and passive-enhanced management in developed markets, for both equities and fixed income, where there are no information advantages to be gained. However, in “almost every other asset class”, the fund employs an active approach because “we believe in active management and in our manager selection process”, Kott says. “You get a transparent formula from your partners, who will go an extra mile and select the best strategy.”

The fund has €117bn under management and, over time, it has shifted more to the passive side. “We use more enhanced indexing, allowing some tracking error and resampling but still follow a benchmark,” he says.

Kott’s department is responsible for global listed equites, including frontier markets, unlisted equities, such as infrastructure, private equity and timber as well as the alternative risk-premium portfolio. The latter includes volatility strategies, long-short as well as hedge funds such as multi-strategy funds and commodities. “These are all very active strategies, and the only passive ones are European, emerging markets and US large caps,” Kott says.

Huisartsen: Concentrated equity portfolio 

Pensioenfonds Huisartsen, the occupational pension fund for Dutch general practitioners, switched to a concentrated equity portfolio of only 65 companies this year. The fund believes such a concentrated portfolio is easier to understand for members and offers better opportunities for engagement. 

Pharmaceuticals, such as Denmark’s Novo Nordisk, and information technology companies like Microsoft and Nvidia (the only two representatives of the Magnificent Seven, the seven largest American technology companies), are among those picked for the portfolio. 

Together, these two sectors account for almost half of the selected firms, most of which are headquartered in Europe. 

“For each of our investments we want to be able to explain why we own it,” says Pieter de Graaf, who is responsible for investments and sustainability on the pension fund’s board. “With this concentrated portfolio, we keep it manageable and make a conscious and convinced choice for each company we invest in.” 

The GP fund is the first pension scheme in the Netherlands to switch completely to such a concentrated equity portfolio. Other funds, such as PME, ABP, KPN pension fund and Rail & OV, have had these types of portfolios for years, but only for up to half of their equity investments. 

Previously, PF Huisartsen invested in several thousand companies, in a broad stock index with an ESG filter. De Graaf says 65 companies is more than enough to provide sufficient diversification within the portfolio. “Research shows that 60 companies already offer sufficient diversification against idiosyncratic company risks,” he adds.

The fund has appointed a new, as yet unannounced asset manager to manage the portfolio, in consultation with Achmea Investment Management. 

The new portfolio will not have a benchmark, although, according to Nienke Kuppens, a sustainability strategist at Huisartsen, the pension fund will continue to “compare with the broad market”.

“In principle, it will be a buy-and-hold portfolio with an investment horizon of at least 10 years,” Kuppens says. “We are also going to monitor this strictly.” 

The new manager has been given a number of additional guidelines for managing the portfolio but will also have the freedom to buy and sell stocks as it sees fit within these new rules, she adds. 

“We want the manager to look at four aspects of each company,” Kuppens continues. “First, there is the financial perspective. The second point is the social footprint: a company must limit the negative impact it  has on the environment and on society. Third, we only want to invest in companies that have the potential to change and will still be a good investment in 10 years’ time.” 

The fourth and final guideline is good diversification. “It is important that you have a few companies in each sector, but that you do not become too dependent on one particular kind of company,” Kuppens adds.

Lægernes Pension: Revised investment strategy

In the autumn of 2024, Lægernes Pension announced that it had decided to shift the management of its listed equities from buying and selling individual stocks to trading via a market-weighted index.

The essence of the revised investment strategy, which is designed to ensure the pension fund continues to produce a good return, is opting out of “hand-picked individual shares” and focusing  more on the overall distribution of investments, according to the Danish pension fund for doctors.

Chief executive Chresten Dengsøe says the pension fund found it has been worthwhile to have managed several types of assets actively, and the institution will continue investing actively in those areas.

But he says analysis has shown that this has not been the case for listed equities.

Søren Nielsen, the fund’s chief investment officer – who has since been replaced by Peter Possing Andersen – said last autumn that active management of listed shares had not produced the desired extra return over the past five years.

“It is not enough for the effort just to result in zero, or create a small return,” Nielsen told the pension fund’s member newsletter. “If we make an active choice, that should produce a significant contribution to the return over time. It hasn’t done that over the last few years, and we don’t expect that to change in the future,” he said at the time.

In the past seven years, when the previous strategy was in place, active management of listed shares underperformed its index, delivering returns that were 0.2% below the benchmark, according to the pension fund.

But Lægernes Pension says its decision to drop actively managing listed equities does not mean it is giving up on trying to outperform the market. “We will continue to work to create an additional return by continuously adjusting the risk we take,” Nielsen said in the newsletter.

He added: “We will do that by taking the pulse of the economy and assessing which investments are cheap or expensive in that context. For example, seen historically, it has often been a good idea to have many shares and other higher-risk investments in the portfolio when the economy is facing a positive turn.”

The movement of listed equities from active towards passive management at Lægernes has been a gradual shift over the past five years, and by last autumn around 60% of its DKK27bn listed equities portfolio was already managed passively.

Since then, the pension fund has been working to restructure the remainder.

Passive management is cheaper, according to the pension fund, which now expects to save between DKK40m and DKK45m annually, although the fund adds that cost savings were not the main driver behind the strategy shift.

PME: From index investing to a more concentrated portfolio

PME, the €59bn pension fund for the Dutch electronics and technology industry, announced a partial return to active investing in 2023. At that point, the fund announced it would gradually move from an index-based strategy to a more concentrated portfolio of between 300 and 400 stocks. 

Last year, it made its first steps towards a more concentrated portfolio by selling its holdings in 112 companies in developed markets that no longer meet the fund’s new, stricter ESG requirements. Companies sold included Nestlé, Rio Tinto and chemicals producer DuPont.

The fund’s global equity index now has about 1,000 companies left. But besides cutting the number of constituents in its portfolio, PME is also constructing a concentrated, actively managed portfolio. “We choose…. active management so we can better manage ESG risks,” says Daan Spaargaren, a responsible investment strategist at PME. 

The fund is now in the process of designing its new active portfolio. “For now, we have allocated 36% of our equities exposure to the actively managed portfolio, with a view to gradually increasing this over the years,” Spaargaren says. 

The scheme will manage four separate, regional equity portfolios with 40-50 stocks in each. PME is still in the process of selecting managers for three of the four portfolios, which is being carried out in cooperation with its fiduciary manager MN. The European equity portfolio is already up and running. 

“We are giving them some freedom,” Spaargaren says. “What we are asking is a well-diversified portfolio but in principle they are unconstrained. We don’t work with a maximum tracking error versus the index.” The manager can choose from the stocks included in PME’s passive index portfolio, with 10% space for off-benchmark positions. 

While many other schemes, including ABP and Huisartsen, have opted for a buy-and-hold approach, PME advocates a more active style. “We call our approach buy-and-maintain,” Spaargaren explains. “This means that we maintain our positions as long as we see fit. To me, buy-and-hold means that you more or less have a static portfolio. Our managers have the possibility to sell when they see fit.” 

PME is aiming to have its three other actively managed portfolios operational by the end of the year. The fund will choose two separate managers for US equities because of the relatively large size of the asset class. The emerging markets equity portfolio will be fully actively managed from the start because of the higher attendant ESG risks. As PME does not invest in state-owned companies in many emerging market economies for ESG reasons, these companies will also be off-limits for the future manager.

Pensionskasse SBB: Consistent investment approach

Dominik Irniger, head of asset management at Pensionskasse SBB, the pension fund of the Swiss federal railways, is clear about his investment philosophy. “There has to be a very strong case for us to use an active strategy,” he says. 

Noting that there are many different opinions about active versus passive management, Irniger sets out his case: “We have had the same approach for the last 10 years and I do not see that changing. Ultimately, our investment committee decides how actively to manage an asset class.”

Irniger describes how the ability – particularly when it comes to predicting the future – of many active managers “tends to be quite low”.

He adds: “But if managers make lots of small bets, they will be successful. 

“This is the law of active management. Less tracking error means less outperformance, but also more alpha stability over time.”

SBB’s listed equity portfolio is semi-passive, using quantitative rules to achieve a low-carbon tilt, achieved by reducing the weight of companies that are high emitters. “This introduces an active element, so that even the rules-based portfolio is not purely passive,” Irniger explains.

“To achieve our objectives, we typically hire more than one external manager per asset class, so we spend some time identifying and selecting good managers,” he adds. “Each asset class is of a reasonable size, so this is possible.”

In practice, this means that SBB, in Swiss bonds, has two managers with a semi-active strategy. Yet, in fixed income the fund has a total of 12 managers and in listed equities there are only three managers, Irniger says. “Where we are more active is in the less liquid space with emerging markets, high yield, private equity and real estate, all of which are managed with a higher tracking error.”

SBB has an internal team for Swiss mortgages and some parts of the fund’s Swiss real estate portfolio.

The geopolitical situation, with trade wars and high uncertainty in the US, could potentially lead to a shift in regional allocations, which is particularly true for private equity investments, Irniger adds. 

“Local returns have also been quite similar in the US and Europe, and with interest rates remaining high in the US, CHF-hedged returns in Europe look more attractive,” he says. “In the public market, however, the MSCI World, with its high US weighting, has performed very well in the past, and it is more difficult to find good reasons to deviate more from the market capitalisation weighting.” 

Velliv: Investment strategy overhaul

Under the new leadership of chief executive Kim Kehlet Johansen, Denmark’s Velliv has overhauled the investment strategy behind a key pension product, relying more heavily on index investment – while adding specific active strategies on top to boost returns.

Kehlet Johansen, who joined Velliv in March 2024 from his role as chief risk officer at the country’s statutory pensions giant ATP, spearheaded the process of change alongside Velliv’s chief investment officer Anders Stensbøl Christiansen last year.

But a change of leadership in the investment department was seen as necessary by the new chief executive, given the investment strategy work, and following Stensbøl Christiansen’s departure in November, Kehlet Johansen worked for a period with deputy chief investment officer Thor Schultz Christensen on the strategy revamp.

In March this year, Velliv hired Lea Vaisalo, head of private markets at Nordea Asset Management, as its new permanent chief investment officer, who took charge in May.

Velliv has transformed the way the assets behind its VækstPension Aktiv (GrowthPension Active) pension product are invested.

“We will spend more time on the dynamic strategies where we can make a difference”

The pension fund says it is structuring the product by building on the foundation of the product VækstPension Index (GrowthPension Index) as a core, and adding selected investments on top, to achieve “dynamic returns”.

It says its investment experts will use their insight into markets to make continuous risk adjustments via this superstructure of active dynamic strategies to create additional returns.

The selected investments will be alternative assets, such as real estate, unlisted equities and credit, as well as timberland and infrastructure – asset types that Velliv says provide greater diversification of risk and have the advantage of additional inflation protection and multiple sources of return.

The idea is that with the new VækstPension Aktiv product becoming simpler and more transparent, it will be easier to make the right decisions at the right time, the fund says.

“We are becoming more aware of how we are spending our time,” explains a spokesperson for Velliv. “We will spend more time on the dynamic strategies where we believe we can make a difference, instead of spreading ourselves too thinly.”

In terms of staffing, the changes have resulted in several exits at Velliv linked to the pension fund’s closure of both its alternatives and active equities teams. The fund says the DKK30bn alternatives portfolio will make up a smaller proportion of the overall investments in future.

Shifting much of the investment to an index-based approach is leading to significant reductions in the costs associated with external managers, Velliv says, with those savings passed on to customers.

Interviews by Tjibbe Hoekstra, Pirkko Juntunen, Rachel Fixsen and Luigi Serenelli