Robeco is boosting its efforts to cater to the Dutch pensions industry. This is not a huge surprise, considering the fact that CEO Roderick Munsters joined the asset manager from pension giant APG, Mariska van der Westen and Liam Kennedy write
“My background is in pensions. And the same goes for Hans Rademaker, who joined the board on 1 February. So it is safe to say that Robeco’s institutional investment expertise has been boosted of late,” Munsters says.
Robeco’s new CEO loves a good challenge. It is a trait that comes in handy as the asset manager intends to expand its institutional investment business from 50% to 60% of total turnover within five years. This means doubling its current 8% share of the Dutch institutional market. To achieve this, Robeco will bundle its pensions-related activities and expertise in a new business unit, Robeco Investment Solutions. The objective is to bring the manager’s fragmented array of services together into an integrated whole.
“We have plenty of talent and products on offer for pension funds, ranging from an all-in-one DC product to pension consultants to legal specialists. But these are stand-alone efforts that haven’t been sufficiently integrated,” Munsters explains. In addition, all those goodies have been under-promoted. “I am not suggesting that we should turn ourselves into a marketing machine. But we have been too quiet and too modest. Our profile in the institutional market isn’t nearly as high as would be justified given the qualities our people bring to the table.”
Robeco means to bolster its institutional business with new products and services in the arena of socially responsible investment, as well as with inflation linked products and food & agriculture funds, according to its strategic action plan for 2010-14, which was presented last April. The asset manager also announced that it would offer pension and investment solutions from a broad perspective including solutions for DC arrangements, average and final salary DB plans and so-called collective DC arrangements.
“It is not our intention to compete directly with pension management organisations on their own turf,” Munsters says. “So we do not primarily concern ourselves with things like ALM and trustee support services. But once strategic choices with regard to policy have been made, we can assist pension funds with the actual management of the investment mix.”
In addition, Munsters expects that Robeco can play a part in the expected consolidation of smaller pension funds: “We are well positioned to help these funds by advising them with regard to investment policy. When it comes to new pension vehicles such as multi-OPF and PPI, we can act as ‘investment engineers’,” he says.
The company also means to market its expertise in the areas of risk management, research and model-based investing to help investors implement ‘smart’ benchmarks and/or provide a floor to protect their returns, according to Munsters.
When it comes to risk management, investors need to carefully consider the options, he says. “Risks you cannot afford to bear or that can be hedged inexpensively, should be hedged. But hedging everything is a very expensive way to get rid of risk. Besides, I believe pension funds should take risks, since they are naturally suited to do so considering the fact that they have a long term investment horizon vis-à-vis economic cycles,” he explains. “Therefore we do not primarily offer pension funds hedging constructions so much as ways to partake of economic growth in Europe, Asia and various emerging markets, while also offering them advice on how to best manage their risks - without necessarily hedging everything.”
One example is longevity risk: the risk that people live longer than expected. “You could try and hedge this, but that is an expensive solution. An alternative solution would be to make reserves for this risk while also looking for investment strategies that offer a natural hedge, such as investing in the healthcare industry. After all, the healthcare sector benefits if people live longer, since the elderly make more use of healthcare services.”
In addition it is important to put risks such as longevity risk in perspective, according to Munsters. “If I were a government official with the department of finance, although I would recognise longevity risk I would be far more worried about the fact that other EU countries aren’t saving to pay for their pensions. After all, that is much worse than the possibility that we here in Holland may be short some €20-30bn in the long term,” he says.
“We share the same currency, the same interest rate policy and the same inflation target with these countries. But how on earth are they, with their pay-as-you-go systems, ever going to get the money to handle the problems of longevity and ageing? Our country is like a star student fretting about getting As and Bs, but it is no good to be top of the class when all the other students fail their tests. Because then there is a good chance the entire grade will be held back.”
Munsters is worried about EU countries struggling with enormous deficits. “The pensions deficit is added to that. I wonder how they intend to make up for that. And what that will do to the value of the euro.” There is a real danger that these countries will look at inflation as an easy way out, as this would shrink their debt, he warns. “The ECB may have a mandate to control inflation and may be independent as a matter of principle, but we have seen the kind of influence that France and Germany can wield.”
Governments have an incentive to encourage inflation: “In addition, demographic developments may lead to higher wages due to ageing and to energy and food shortages due to, among other things, changing consumption patterns in developing countries. All these things put together are reason for me to be bearish on inflation,” Munsters says.
That is why Munsters is “very pleased” that the Frijns Committee has advised the Dutch government to review the present nominal supervisory framework, FTK, and possibly change it to a more real framework. “I do believe this advice will be heeded now.”
As more attention is being paid to the dangers of inflation, the risk profile of pension funds changes. “And that is where we come in,” continues Munsters. “We can help, not so much in terms of hedging but in terms of making the portfolio less vulnerable to unexpected inflation.”
“One option is to look at real assets. Larger pension schemes are already doing this by way of a considerable allocation to inflation-linked bonds, or even by investing in synthetic investment vehicles based on underlying assets that offer a good inflation hedge, such as toll roads. More pension funds should be looking for ways to make themselves less vulnerable. In the same vein, they should reconsider whether they want to hedge their nominal interest rate risk.”
Robeco’s approach as an asset manager in these matters is decidedly active. Pension funds tend to gravitate to more passive investment approaches of late. This means an active manager such as Robeco is rowing against the current. How does Munsters like that particular challenge?
“There are two ways to look at this. First: in 2009 it didn’t make much of a difference which investment approach one adopted, as everything was doing well. But in 2010 it once again comes down to stock picking, because all investments are no longer doing equally well. That is one perspective. A different perspective is to look at where one might add value. If you are yet another manager trying to beat the MSCI World, you are going to have a more difficult time than a manager who has something special to offer - something that is in high demand, something that is difficult to gain access to or is innovative. In the latter case, it is easier to add value for the customer,” he says.
“Both perspectives show where the opportunities for Robeco lie. We are trying to position ourselves as an asset manager that is competitive not so much in terms of low prices but in terms of market access and ideas and concepts. That is part of the new strategy.”