This “finely-tuned beast of a fund just keeps on delivering,” was how one of the judges described ABP. The E148bn fund for civil servants has a reputation as an efficiently run operation and with contributions of around E2.9bn per year and with 1.2m members, it needs to be. Judges for the best investment management strategy in Europe were particularly impressed by the highly regimented top-down approach taken by the fund. Permeating it from top to bottom and at every level of management is the concept of risk management and budgeting.
And although ABP takes this top-down approach, the allocation of risk is the figurative foundation upon which investment strategy is based. Or, as Thijs Coenen, the man responsible for the fund’s risk management says, “in our view the risk allocation process is the most important assumption when examining investment strategy.”
In an industry where risk management now attracts more attention than ever, it is hard to imagine any other fund giving it quite the priority that ABP does. Written large on the application for best investment strategy was this concept, not lumped together but broken into various categories including financial, market and credit risk and ABP’s latest priority- operational risk. In the submission to the judges, Coenen stressed that there has to be a specific and conscious decision to allocate financial risk. “Without that decision, no pension fund can beat the benchmark and get the return which we all seek,” he said.
There is little novel about ABP’s investment philosophy but this should not be taken as a slight. After all, the fund is like many others in that it takes a top-down view of risk, measures, evaluates and quantifies it and then allocates the risk budget. Nothing unusual about this, rather it is the manner in which the strategy is executed and then monitored.
On page 23, allocated to ABP’s award for best investment strategy in the Netherlands, there is a more detailed description of the fund’s investment strategy. But one of the aspects that impressed the judges was ABP’s attention to operational risk, the risk emanating from faulty IT systems, from human error, from legal and regulatory shortcomings and from errors in the straightforward day to day operation of the fund.
Lack of space prohibits much elaboration here, only to say that the fund divides it into no less than six different categories, measures it, quantifies it and formulates a strategy to control it. Once this strategy is settled, there is continuous monitoring. Regular reports from both the front and back office are collected and quantified whenever possible and the fund undertakes what it calls “risk dashboards” that reveal any deviations from the carefully specified levels of risk. Coenen says of operational risk, “this is a relatively new concept and one not understood by many funds. The aim is to limit the impact of negative events within our operation and identifying the balance between our company goals, risk and management.”
But what is equally important, according to Coenen, is that everyone from the CEO down to the lowliest of portfolio managers appreciates and understands. “The concept has to be implemented through the management structure, and here there is a danger that there will be a breakdown. Creating an efficient process is the challenge.” The judges feel that ABP has undoubtedly met this challenge and is worthy of the accolade of having Europe’s finest investment strategy.

Topics