Local managers reassert hold
The Dutch pension industry is undergoing a shake-up, as pension funds respond to new regulatory obligations and asset managers cut costs and reorganise in an attempt to claw back market share they feel is being lost to foreign players, according to the latest annual trends poll carried out by Nuenen-based consultant Bureau Bosch.
For some time Bosch’s research has indicated that the Dutch industry is feeling vulnerable. “We polled 75 or so of the most active investment managers in the Dutch market,” says Fritz Bosch, director of Bureau Bosch. “We ask them not only about their performance but also about their perceptions of market developments.”
Currently, Bosch is processing the data collected from asset managers at the end of March in preparation for its 2004 report, its ninth, to be published in November.
“The main themes this year are the reactions to the changes to the regulatory framework, the new FTK requirements from [ local pensions and insurance_regulator] the PPK and IAS 19, the international reporting requirements that we have to fulfil,” Bosch says. “Together they say that the performance of a pension fund must be consolidated into the balance sheet of a company while the assets and liabilities should be valued at market value.
“This is presenting the industry with a major dilemma. The result of pension fund results having an impact on a company’s balance sheet is that company CFOs want to reduce pension fund volatility through the introduction of a more risk-averse asset management policy. But in order to fulfil the liability requirements of their participant pension funds they have to improve their performance, meaning a diversification of asset management strategies, including the use of hedge funds, commodities and private equity.”
Bosch says that the use of these asset classes tends to be restricted to the larger Dutch pension funds.
However, it is reinforcing an existing trend. Last year the Bosch report noted that asset management was becoming increasingly complex in a search for alpha and the targeting of returns, and that this had created an interest in liability-driven investments, demanding a closer appreciation of the liability profile that the assets are there to match. Bosch adds: “This throws the spotlight on such banking products as interest swaps, futures and over-the-counter products and leads to a higher degree of specialisation among asset consultants.”
This year he says he has found “investment bankers knocking on the doors of those pension funds that have a lower coverage ratio, offering their capital market products, including derivatives” adding “Dutch pension funds are concerned by the poor transparency and cost of such products, raising questions about whether they will be taken up”.
Last year’s survey found that 70.9% of externally managed pension plan money was handled by the top 10 managers, down from a peak of 82% in 1995. It also found Dutch managers dominating the top 15 slots, with foreign managers being stronger than their Dutch rivals in the next segment down.
This may have contributed to an industry-wide perception noted last year that foreign players produced a better performance, with the Bosch report noting that Dutch companies felt that they had lost market share to overseas groups.
In fact, last year’s data did not support this assessment. According to Central Bureau of Statistics data, at end-March 2003, Dutch pension fund assets totalled E403.5bn. Of the E296.6bn that was externally managed, some 67% was managed by 19 Dutch companies, up from 55% in 2002, while 33.1% was shared between 47 foreign managers. This suggests that the management of Dutch pension assets is primarily a Dutch affair with gains being made primarily at the expense of US companies, which saw their share of Dutch assets under management halve to 14.4% from 28.7% in 2002.
The figures were somewhat skewed by the hit taken by equities, the asset class in which most foreign asset managers have the strongest representation, the 40% fall of the dollar against the euro and the rise in the number of Dutch pension schemes that have gone commercial, offering their services to third parties, in recent years. But the number of mandates handled by US companies remained static. British companies did see their market share rise, but only to 13.3% from 11.5%, and Swiss activity rose to 3.6% from 3.2%, although it could have been higher as UBS does not give a figure for its Dutch presence.
Nevertheless, last year’s survey revealed that the overwhelming majority of funds - some 75% - felt that active Dutch managers performed adequately in bull markets but lagged in bear markets while 54% believed that this did not apply to foreign managers. Some 57% felt that Dutch managers were too passive, engaging in closet indexing, while 67% felt that this did not apply to foreign players.
And while most asset managers reported a major loss of managed assets between March 2002 and March 2003, which they ascribed to the actions of the financial markets and their growth-management style, among those who reported growth were Goldman Sachs up E1.4bn, Merrill Lynch up E1.2bn, Vanguard up E600m, and Northern Trust up E600m.
This year’s findings indicate that foreign-based companies again performed well with Barclays Global Investors, State Street, Vanguard, Goldman Sachs and Pimco being notable gainers and JP Morgan to a lesser extent. “We have also seen that a number of pension schemes were looking for Anglo-Saxon managers instead of Dutch,” he added. “In addition, foreign companies dealing with the Dutch market from London are increasingly indicating an intention to have a presence in Amsterdam or Rotterdam.”
Another recent preoccupation is a debate over the level of expertise of pension fund boards, Bosch says. “As Dutch pension funds increasingly become special purpose vehicles it is becoming evident that some pension boards are not up to coping with the financial, actuarial, asset management and administrative issues that arise.