Liam Kennedy spoke to Marcel Andringa, CIO, SPF Beheer

With two clients accounting for the bulk of the assets under management, SPF Beheer understandably values the proximity and dialogue with its pension funds. “We are a fiduciary manager with a few important clients - we are constantly on speaking terms with those boards and we make those decisions together so the boards know what is going on within the portfolio,” says CIO Marcel Andringa.

Utrecht-based SPF Beheer managed €13.2bn as of 31 December 2009, of which €10.7bn was accounted for by the Dutch Railway Pension Fund and €2.3bn by the Public Transportation Fund.

The January 2010 Frijns Committee report on Dutch pension funds highlighted issues of governance and understanding by pension fund trustees of the risks of investment that are taken on their behalf. Andringa believes that there is sufficient investment knowledge on both of the boards of his two main clients. “If you go back to the Frijns report, I think both our boards are involved in all the important investment decisions,” he says. “Then there is the investment advisory committee, with two members of the board and four external specialists, who advise the boards about investment policy. Next to the investment advisory committee, SPF Beheer also advises the boards.”

For SPF Beheer’s clients, strategic asset allocation is the decision of the board but Andringa believes there are a still a lot of questions to address in the area between strategic and tactical asset allocation: “We always address these questions together with the boards. That holds especially for major changes in asset allocations or investments in new categories or products.”

Other decisions of the boards include ESG as well as the strategic interest rate hedge. “Regarding the strategic interest rate hedge, the boards are in control.” Andringa says. “That is also why we are reluctant to invest in structured products. Even though SPF Beheer understands these structures in general, it is difficult for the boards to really understand what these products are. Another reason not to invest in structures is their lack of transparency.”

Andringa continues: “At the start of 2009 the most important change was to increase our interest rate hedge from 40% to 60% for the Dutch Railways Pension Fund and from 50% to 60% for the Public Transportation Fund.

“This was implemented with swaps and the majority of the fixed income portfolios, government bonds, credits and Dutch mortgages. Before, our clients had two government bond portfolios with different durations. We combined the two portfolios with the goal of matching the cashflows of the liabilities. This decreased the interest rate risks of our clients.” Next to the fixed income portfolios interest rate swaps are used to reach the 60% interest rate hedge.

Like other investors, SPF Beheer has taken a root-and-branch reappraisal of its investment processes over the past year. “We had a look at our investment decision-making process in 2009 but we decided that it was robust because it is very clearly defined where each decision is taken - whether in the board, the investment advisory committee or within SPF Beheer.”

Andringa continues: “At the end of 2008 there were a lot of questions about what to do in 2009. I think it’s important that, although our clients had negative returns in 2008, we didn’t see the problems that some pension funds saw, such as with investments in hedge funds. We did not invest in structures that we could not value and were not able to sell and we already decided a few years ago to sell our investments in mortgage-backed securities. Indeed, while SPF does invest in private equity it does not invest in hedge funds.”

On behalf of its clients, SPF Beheer conducts an ALM study every year and has done so for some time. But at the beginning of 2009 the boards of SPF Beheer’s clients went through the whole investment policy and all investment processes with SPF Beheer - “even back to basics, such as why to invest in a certain investment category”, as Andringa puts it. A conclusion was that implementation is important and diversification does not always hold out in practice.

The boards concluded that the strategic asset allocation was robust, but some improvements were made. One was a clear choice for Dutch real estate, which is managed in-house. “We decided to stop investing in private real estate and sold our public real estate investments. The advantage of Dutch direct real estate is the diversification benefits and the link towards Dutch inflation,” comments Andringa.

Public real estate has too much equity risk and the high leverage within private real estate funds is a disadvantage, according to SPF Beheer. “We were not allowed to invest in private real estate with more than 50% leverage and therefore the universe of interesting investments was small. 2008 showed the risks of too much leverage in private real estate”

Andringa continues: “International diversification has decreased due to the disinvestment from public real estate. On a total portfolio level the diversification benefits of public real estate is negligible.”

SPF Beheer is also placing greater emphasis on valuation within the asset allocation - which others call medium-term or dynamic asset allocation - for asset classes like equities, commodities, credits and emerging markets debt. “The strategic asset mix is not always the actual asset mix”, says Andringa. “At the moment we do not think that equities are too expensive but if we think in general that they are too expensive, based on valuation grounds, we will advise the boards to lower the medium-term weight in equities. For specific asset classes, like emerging market debt and credits, the boards have defined thresholds for spreads. These are the levels at which in general we advise the boards to lower the medium-term weight in the asset classes.”

A further improvement was to increase the weight of the strategic equity portfolio - a Warren Buffett style long-term, long-only portfolio with a value focus and managed in-house. “The strategic equity portfolio makes up 50% of the total equity portfolio. We don’t choose stocks because they are in the benchmark but because they have long-term value,” says Andringa. “For the strategic equity portfolio our goal is to invest in 70-80 companies in our investment portfolio, with a focus on US and Europe. This is long-term, long-only equities with a value tilt, a straightforward way of investing in equities.”

Andringa expects lower volatility and says it is easier to engage with a smaller number of companies, also regarding ESG. “Because of the smaller number of companies it is possible to do more in-depth research”, he says. “If there are doubts about ESG we will start an engagement process. If the company’s policy does not change within 1-2 years we will disinvest.”