New mould for metal fund
Pensionfonds Metalektro (PME) is an industry-wide scheme for Dutch metal and engineering workers. It is a defined benefit scheme and has over E18.5bn of funds under management. Its investment profile has been transformed since 2001 when it was 100% managed by Achmea. A shift away from balanced management has led to ever-increasing levels of diversification and specialisation. The fund currently holds 7% in direct real estate, 1% in indirect real estate and a further 7% in commercial mortgage-backed securities (CMBS). Fund manager Paul van Gent has played a central role in the repositioning of the fund’s investment profile. He spoke to Ashley Nield
Which route did you use to come up through this industry?
Before taking up this job I worked in London for five years with the IBM retirement fund for Europe/Middle East/Africa. Before that I was a client service person within an insurance company and prior to that I was an analyst.
Many pension funds are struggling to cover their liabilities. ‘Black holes’ are common. What kind of situation do you face at PME?
In one sense, everyday we look into a black hole because we can’t perfectly forecast the future. The main goal of the fund is managing the potential risk which might arise in this black hole, so we look at our liabilities closely and our policy is formulated as a risk against them.
We take account of interest-rate mis-match and we look at all assets in relation to our actual goal: the paying out of pensions.
Within the context of the Dutch universe we’re quite far down the path, not as far perhaps as funds such as Hoogovens and Philips – they have managed their situations completely. But we are 80% of the way there. We haven’t reached the comfort zone yet but we feel as though we have some control over our destiny.
Some European fund managers are reeling from the imposition of new legislation, including the Dutch funds with the FTK. How has it been for you?
Consider the pension fund as having two sides, the members’ needs, and the investment business. In the former, there have been changes recently to which we’ve had to adjust the pension scheme: what we pay out, how we deal with early retirement and so on.
If you look at the investment side, I would say that many of the legislative changes have been things that we anticipated and were already relatively comfortable with. They make economic sense. One can always discuss questions on where the lines are drawn, how much risk you can run, for what periods of time, and so on. These are issues which affect us, but the basic idea of looking at liabilities more closely and marking them to market seems very reasonable and logical.
This process is much easier to deal with than random legislation that you can’t predict such as creaming off profits for new forms of taxation.
Are you a supporter of the “flight to bonds” in the wake of poor equity market performance?
I don’t think I’m a supporter or a detractor of bonds; they’re a fact of life, in the sense of what is the only reasonable discount rate to use to determine if you have enough for the future. It’s more or less like looking at yourself squarely in the mirror and seeing the facts. I would agree that the current interest rates are not pleasant. If you put a bond away and you’re only earning 1.5% above inflation it’s a slow process to get yourself out of a problem. That’s also a fact of life and means that it’s only the contribution levels and the adjustment of members’ benefits that can help you out of such a situation.
The latter can mean working longer or not indexing fully (which is quite common in the Netherlands: you pay 80% of inflation, 90%, whatever, and in that way manage the situation a little bit).
But it’s not the thing to get you out of a hole: the only thing which can do that is taking risk. And that’s double-sided because it can put you in deeper or help you out.
How do you approach that risk?
Managing the risk and knowing why you’re taking it is central to our approach. Do we really believe, for example, that not hedging interest rates will give us return?
If interest rates are to rise then we shouldn’t hedge everything. How much risk do we want to take on that? Could we run into a Swiss or Japanese situation with structurally low interest rates perhaps forever? Going from 3.5% to 2.5% is still a painful downward road, and I would say that we are not quite sure where that road will be. We will only take a measured risk on such a position.
What does your overall asset
allocation look like at the moment?
Slightly more than 6% in commodities, 7% in direct real estate and about 1% indirect, 32% in equities and the remainder in bonds. But we look at the interest rate mis-match as a risk question and not just as a return. We use swaps and other instruments to manage the risks so just because we’ve got, say, a 55% allocation to bonds doesn’t tell us that we’re 55% covered in regard to interest rate mis-match.
Is your direct real estate portfolio a legacy of the Dutch way of doing things?
For a certain size of fund upwards, direct real estate holdings are typical for Dutch institutions although there are those which have none. This is possibly the result of bad experiences in the past or possibly they thought the market was peaking earlier and have exited. But 5% to 10% is normal. Geographically, ours is virtually all Netherlands-based apart from a few logistics sites that we own in border areas.
What do you think about the portfolio’s performance?
The returns would need to be higher to make me happy about the holding, but let’s say I’m not dissatisfied. I would have wished for a little bit more, but basically we’ve got the data we were thinking we would get, so it has performed in line with expectations. Our 1% indirect holding is in actively-managed worldwide quoted real estate.
Can you see the real estate asset mix changing dramatically in the future?
Everything is open for change because the only thing we look at is cold expectations of the future. So we’re not in love with bricks and mortar, and there’s no building that I feel we need to keep in our portfolio. It’s a valuation question: I think locally we’ve enjoyed favourable circumstances in past years with Dutch real estate performing relatively well against continental benchmarks.
Having ridden that wave I think we are now forced to look further afield and ask which markets are offering better returns and what is the best way for us to access them.
We still see lots of implementation issues, however. In the first instance we would look pan-European because this would be subject to the kind of inflation exposure we would have to pay on to our members.
But there are very few direct managers or funds that can offer you a broadly-spread, European-wide portfolio. They might have Italian shops in Rome and Milan, but not covering Italy, not covering Spain. We’re kind of testing what’s out there that offers a more equity-like approach.
What’s the feed-back so far?
The markets are often still dominated by non-institutional players that can manage -through leverage and other things - to create quite tax-efficient vehicles for themselves. That’s probably how the transaction market is put together and I would be reticent to believe that my Dutch real estate manager would know the right people to talk to in Berlin, Paris and so on.
We have a very small staff: the people making the investment decisions are just four in total. No one is specialised on real estate, we look at everything from setting up our own policy, risk management, manager selection and monitoring, to doing all the tactical positions. We look at the whole as generalists and we’re not aiming to see 30 real estate managers in order to have two in each of 15 countries.
There could be some attractive mergers amongst managers across Europe if they are able to solve the personality issues which seem to occur more in the real estate world.
If the fiefdoms within a European manager empire are very strong (German manager maximising the German market, the Dane doing the same in Denmark and so on) then we would be unlikely to arrive at an optimum allocation.
Would you choose the indirect real estate route to cover broader
Indirect is fine, probably not quoted in the first instance. Quoted really lies in the equities sphere so we look at this mainly when we analyse the world of equities although we do look at the two together.
Our portfolio is reasonably diversified with E1.5bn spread across retail, residential, offices and industrial.
On a pan-European basis, the ideal would be a pool of, say, 30 countries, with E 45bn invested at the total level. That would give us a diversification equivalent to our Dutch portfolio. You would say that’s a believable European fund to invest in.
We are way too tiny to ever buy direct holdings everywhere and then manage them.
What about CMBS?
We have a mortgage portfolio, it is
also worth about E1.5bn, with 50%
in commercial mortgages and 50% in residential. But we regard that as part of our bond holdings. Our CMBS are based on our own originated bonds so we hold the mortgage with the guy who is buying the building. We would own the building if he refused to pay, but we are not looking to acquire assets through defaults. We would like them to be able to pay so we can focus on the bond.
We shy away from mortgage holdings where the assets are less than the loan values because we want to be able to absorb a downturn in the market without being clobbered by it.
Our US manager is also allowed to buy CMBS at their discretion depending on where they see value across the whole of the fixed income spectrum.
In general, we try to keep CMBS as a level portfolio rather than one which goes up and down with the ebbs and flows of the real estate market.
Have you invested in property-based derivatives yet?
We’ve looked at these once but the market didn’t seem to be very liquid. For example, for us to increase our allocation by 2%, could we buy E400m worth of real estate assets through this product? I would think that would be very difficult. I may be wrong, but is my impression.
When the market becomes more mature and you have more players then property-based derivatives may develop. But the fact that everyone is such a local player is another hurdle to overcome. If you could do it on the European level, it would help everyone get to the precise allocation they want.
PME at a glance
n Metalektro (PME) provides a pension plan
for over 1,300 employers, 160,000 employees, 142,000 pensioners and 340,000 deferred
n It is a Dutch leader in socially responsible investing (SRI).
n Over the last decade it has earned an
average investment return of 8.9% compared with the Dutch pension universe (all funds excluding ABP and PGGM) figure of 8.4%.
n In the first three quarters of 2005 PME earned an average return of 16% – the best
n In 2004 PME’s asset allocation achieved
the following returns:
Shares 8.3% (Dutch pension universe 9%)
Bonds 10.3% (universe 7.3%)
Real estate 13.2% (universe 11.9%)
Commodities 4.4% (universe 13.3%)
Currency hedging 3% (universe 1.1%).
n Overall return 11.9% (universe 9.9%).
n In the 2005 IPE Awards PME won the
regional prize for Best Pension Fund in the Netherlands.