Though living in highly exciting times, the Dutch asset management industry does not see itself in any way cursed by its situation, whatever the Chinese may say.
With the world's biggest pool of pension fund assets proportionate to national income, and a thriving mu-tual fund and insurance industry, the industry has a very well developed institutional asset base.
We are sitting on top of a fat pool of institutional money," says Toine van der Stee, managing director for the Netherlands of major asset manager Robeco in Rotterdam. "We are in very favourable circumstances to market money management."
With the Dutch stock market posting excellent returns, like other major markets, assets under management have been burgeoning, with the pensions market alone accounting for some $300bn of assets at the end of 1997, according to a recent survey of Dutch managers by Bureau Bosch. The survey estimates about 50% of this is still internally managed. Among the intriguing questions facing managers is how much more of this will come their way.
The top ten industry-wide schemes control an enormous portion, with the two biggest schemes, the huge civil servants' scheme ABP and the health employees' PGGM amounting to some Dfl350bn ($175bn) of this.
The top ten or so schemes in the market, 'the upper segment' as Raymond Brood, managing director of Utrecht-based Fortis Investments calls them, have large investment staffs of their own, but outsource their specialist investment requirements. The mid-segment, put by some as funds with assets of Dfl3bn-12bn, is already outsourcing. According to Brood: "They outsource nine out of ten times."
The smaller funds are often insured arrangements, but still include those run internally. Besides the 80-plus industry-wide schemes responsible for some 60% of pensions assets, there are 1,100 other schemes and the trend here is to consolidation, and presumably the larger grouping of assets will carry a higher propensity to outsource. At ING Asset Management in The Hague, Michel van Elk says: "The trend will continue for smaller and medium funds to be balanced, while the larger will be specialist. But more and more funds will outsource to external managers." Mark Lammerts at ABN AMRO Asset Management in Amsterdam points to the increasing political pressure on small-er funds to outsource to professionals.
Another intriguing question is who is who nowadays in the Dutch asset management market. With the consolidation within the banking, insurance and asset management groups, we have seen the formation of powerful combinations, such as ING, ABN AMRO and Fortis; Robeco (though tied up with Rabobank) and Lombard Odier seeing themselves as the stand-alone indigenous asset managers, and major insurers such as Achmea and Aegon also promoting their asset management capability.
But there are other players in the market. The one with most pensions assets under management is PVF Pensioenen in Amsterdam, which re-cently announced that it was joining forces with Achmea.
"PVF's history is a very short one, having been formed in 1994," says Jan Straatman, PVF's head of equities. It was spun out of social insurance group GAK to provide a combination of asset management and pensions administration, which it now does for 22 funds. "Most of our clients avail of both services."
At Robeco, Van der Stee points to last year's acquisition of Beon, a company that administered four pension funds for an industry branch. "We are now restructuring that company, so that it can can work for other companies and already one other industry branch has joined up. We expect a lot more of this to happen."
What drives this trend is the need for good pensions administration as a way of attracting business. "Beon has state-of-the-art administration systems that many other pension funds could use." Robeco has many clients who could use these systems and any new administration clients can be offered the group's asset management services at arm's length. "It was both a defensive and an offensive move," he says.
At PVF, Straatman sees systems giving the group an edge in the marketplace where pension funds are discussing coming together. He sees problems for them: "It would be ex-tremely difficult for them them to combine with other funds, unless they have a really sophisticated system like ours." In Amsterdam, Lombard Od-ier's marketing director Jan Felderhoff says that asset managers must see groups like PVF as being "seriously in our market when companies or others want to outsource both investment management and administration to-gether".
Insurance companies Achmea and Aegon are highly active in the pensions asset management market, handling the insured pension accounts. ING, with its Nationale Nederlanden insurance operations, is the biggest in this market. Fortis reckons a third of its assets under management is internal money, mainly from the insurance operations. A feature of these insured separate pension accounts is that they must provide a minimum return of 4% per annum under the insurance regulations - though, as Alexander van Aken, marketing manager of Achmea Asset Management in Apeldoorn points out, this has not been a problem in recent years.
Generally, the accounts are managed in Achmea's case according to the risk tolerance of clients. Insurers active in the market have combined pensions assets of some Dfl345bn, according to the Dutch Central Bureau of Statistics. But as one manager observes: "Some of the insurance companies do have difficulties in showing that they are capable of servicing the more professional needs of pension funds, especially those looking for specialised products".
For ING, any consolidation of in-surers and pension funds is essentially defensive. General manager Martin Nijkamp regards it as a move by pension funds to sell more products such as insurance, banking services and mutual funds for defined contribution early retirement schemes. "They are trying to add services for existing customers, but they are not looking in an aggressive way to target new customers." While it clearly deprives groups such as his of an opportunity to benefit from such alliances, it is not otherwise a threat in his view. "We know there are talks between pension funds to see if they can come togeth-er," he adds. But this is more likely to result in increased outsourcing activities than the formation of asset management companies.
Another feature on the scene is the move by pension funds to turn to third party management, as exemplified by Philips through setting up Schootse Poort, where it already has a number of third party mandates. Established domestic managers too are assessing the implications for their business and how potential clients view their credentials.
"Philips' move can be seen as one way of downsizing costs," says Felderhoff. He points to moves by others, such as the railways, to set up their own investment management operations, which could end up managing money for the pension funds of their subsidiaries, even if they are sold on. But one of the main catalysts of change will be the arrival of the euro, which institutional clients are now seriously turning attention to, in particular it might well give an extra edge to the outsourcing debate.
According to Angelien Kemna, head of equities at Robeco, many pension funds will be faced with a critical decision, regarding their Dutch portfolios, which funds manage in-house, as they become euro-portfolios and diversify out of domestic stocks: "Are we going to do the euro-equities ourselves?" With the inevitable shortage of skilled staff, it is going to be extremely difficult. "If you have under Dfl1bn under management, we think your size will not allow you run your own investment department," she says.
Fortis' Brood agrees: "Funds will need a bigger staff to run euro-portfolios. Is it really efficient to do this? The tendency will be for outsourcing to increase." But there could be a counter trend, with some funds now outsourcing non-domestic mandates, bringing the euro portions back in-house, warns one manager.
PVF says it has had discussions with other pension funds, which have continued to manage domestic assets in-house, while outsourcing the international element, about their strategy in the face of the euro. Straatman says: "Will they continue to manage them in-house when the domestic market is going to be tenfold in size?" He feels the development of 'semi-specialist' mandates could be one result. Apart from the large pension funds over, say, the Dfl12bn mark, which will usually pursue a specialist route built around a core portfolio, the bulk of funds have balanced portfolios. Both these core portfolios and the balanced are going to have to change with the euro, say Felderhof of Lombard Odier. "Funds will have euro-liabilities and will need a euro investment policy within the next 10 months for both fixed income and equities." Clients are already being advised that fixed income will diversify looking for additional returns as Dutch bonds will have the lower yields and using emu bonds with euro benchmarks.
The core of equity portfolios will be pan-European equities, no longer Dutch equities. "Typically 60% of equity portions of portfolios will be pan-European on a sector and no longer a country approach," he says. "Investors will want to diversify because certain sectors are not available on the Dutch markets, such as pharmaceuticals and automobiles." But he points to an anomaly. "Funds have done their asset/liability modelling, which always included domestic equities as an asset class, but there is no asset class in these defined as European equities. What is coming out in the models is the recent information about the sort of returns and standard deviations for European equities, but these are not in terms of pan-European equity portfolios."
Dutch managers across the board are reacting to the euro. ABN AMRO has been developing its sector ap-proach for around 12 years and be-lieves that it has a further edge here in that it has done this on a global basis. "The euro is just a catalyst towards this," says Lammerts. But though clients are responding to this European sector approach, they believe funds need a Dutch benchmark in their portfolios. "We have a big dom-estic fixed income asset base and there will be no reason to maintain that in the long run," says Straatman at PVF. "It's different with equities, as the nature of the companies does not change. Our clients will be more interested in maintaining a domestic asset base in equities than bonds. But we will reduce our domestic equity base and set up a pan-Europe portfolio, making an adjustment for the UK. We have already shifted our European equity investment strategy from country to sector decisions last year."
Paribas, one of the growing band of foreign asset managers with a marketing base in the Netherlands, finds Dutch funds are seriously examining their euro options and are keen to discuss these. "Not all internally managed funds will have the time to build up in-house euro expertise," says Quirine Langeveld, head of institutional asset management at Paribas in Amsterdam. "We are finding a lot of interest in our pan-European ap-proach. On the bond side, credit specialists are being introduced into our teams, while on the equity side, sector expertise will be gradually enforced in our traditional country approach. However, we believe that country factors will remain important in managing pan-European equity portfolios and we do not want to turn our investment process upside down."
And a warning on the sector ap-proach comes from Robeco's Van der Stee: "From a marketing point of view, we see people's interest in sectors. We still do not have a 100% fitting sectoral approach. We do have our sectoral approach in that we want our portfolios to be reasonably spread over different sectors, but we do not have the tools yet."
The arrival of the euro is not ex-pected to bring an accompanying rush of international interest in the Dutch market. Though something like 35 international managers are active in the local market, according to the Bureau Bosch survey, their penetration has been limited to a 20% or so slice of the market, with around half of this reckoned to be in the hands of Barclays Global Investors.
Paribas, with assets of Dfl1bn for Dutch institutions, sums up the experience of many of the aspirants from abroad. "We mainly focus on the top segment of Dutch pension funds, as it is easier to make the breakthrough there because these funds are familiar with the specialist mandate approach, have experience with style management and internationalising their investment portfolios," Langeveld says. Though Paribas has received some balanced mandates, that is not typical. "It is not easy to break into the share ABN AMRO and ING have of the middle-sized pension fund market." The aim is to concentrate on the trend to specialised accounts.
Balanced mandates make up the bulk of outsourced pensions business in the Netherlands and this is where the local commercial managers excel. They, too, pick up the trend to specialists and will undoubtedly play a more active role here, providing more competitive products to the many non-domestic players trawling in their market place. But the arrival of the euro may give the local players a further edge.
Of the main competition, the Anglo Saxon managers, one says: "They have a wait-and-see approach to the euro, so it is difficult for them to tell their clients about the euro. They are not tuning their products to the euro." At Lombard Odier, Felderhoff says that there could be more competition from abroad on the balanced side as a result of the euro. "But the powerhouses in the US and London do not seem to be preparing themselves for this business."
The amazing foreign manager success story has been that of Barclays Global Investors (BGI), as inheritor of the Wells Fargo Nikko mantel, with its specialist indexed approach. This very successful incursion does not appear to bother the local players un-duly, clearly being very much wedded to its strengths as an active player. As one puts it: "We are quite happy to see BGI and State Street running through the streets, they will definitely get their mandates from at least the top pension funds who are looking for passive managers. In that field we do not compete."
For BGI the market has moved on as Hillary Smith explains: "Among the bigger funds, there is a take up for 'ad-vanced active'. They are looking at al-pha tilt strategies and at tactical asset allocation strategies." BGI has four Dutch clients with alpha tilt and is expecting more.
"The acceptance of indexing is percolating down to the medium sized fund," she adds. The euro will increase demand for transition management.
But the euro will enable the Dutch groups to bring their considerable financial strength to the developing pensions markets in Europe, including central Europe where ABN AMRO and ING are already heavily involved. For ING the combination of insurance and asset management is proving to be a powerful alliance in these new markets, says Nijkamp.
For Robeco, Europe has long been a marketing stamping ground for further development. "We see the euro bloc as a new basis for our domestic market for investment management business," says Van Aken of Achmea Asset Management.
No one expects the huge Dutch defined benefit system to move from its current position imbued with a solidarity approach, but there are signs that the system, widely regarded as Europe's most comprehensively funded, will change, under cost and performance pressures, as well as social demands, such as those for increasing invidualisation and freedom to move around schemes. The use of average salary rather that final salary could be a consequence, ac-cording to some. "The change from DB to DC will depend on how much DB is going to cost ultimately," says Brood of Fortis, who notes the trend to individualism within Dutch schemes, which could see the DB reduce to 50% of final salary, with more individual participation. There is an active 'early retirement' product line.
This is a very fast-growing area for insurers, says Achmea, since pension funds cannot offer individual ac-counts and do it through insurance products, frequently on a unit-linked basis. This, of course, is another reinforcement for lateral consolidation within the pensions management area. The growing professionalism and awareness of investment issues outside the major funds is something managers are becoming acutely aware of. The role consultants play in helping to develop the level of awareness is commented on positively by managers, even though it is changing the nature of the game. "Each week, we are having to explain what we are doing more to clients," says one manager. "Clients are becoming more aware of style, as the market becomes more professional," says Van Elk at ING. "This means we are having to say more and more what we are doing and why. Style recognition, however, is still at an early stage of development."
As the debate on industry-wide scheme performance develops, performance issues will be at the fore. The market is moving to adopting standards of performance, based on US examples. "It will be very important to have your investment measurement comply with these guidelines," says Langeveld of Paribas. "Pension funds are now asking for this. As we have been managing money in the US we are able to comply with these.