Pensioenfonds Huisartsen, the occupational pension fund for Dutch general practitioners (GPs), is switching to a concentrated equity portfolio of about 70 companies. Such a concentrated portfolio is easier to understand for participants and offers better opportunities for engagement, according to the fund.
“For each of our investments we want to be able to explain why we own it,” said Pieter de Graaf, who is responsible for investments and sustainability on the pension fund’s board. “With this number of 70 companies, we keep it manageable and make a conscious and convinced choice for each company we invest in.”
The GP fund is the first pension scheme in the Netherlands to switch completely to such a concentrated equity portfolio. Other funds, such as PME, ABP, KPN pension fund and Rail & OV, have had such a portfolio for years, but only for up to half of their equity investments.
Previously, the GP fund invested in several thousand companies, in a broad stock index with an ESG filter.
“This made it sometimes difficult to explain to participants why we invested in certain companies,” said Nienke Kuppens, a sustainability strategist at the fund.
“We are now following an ESG best-in-class approach, in which we only invest in companies with a relatively good ESG score. But such an ESG score also has its limitations, and is often difficult or impossible to explain to participants,” she added.
Fast food
In 2022 a survey conducted by the pension fund showed that participants no longer wanted to invest in fast food chains. However, due to the fund’s passive investment policy, it could not sell the companies in question.
At that time, pension fund Huisartsen had been investigating for a while whether it could switch to a more concentrated portfolio, and the outcome of the survey gave additional impetus to this, according to Kuppens.
Diversification
The new equity portfolio, worth over €2bn, will soon be limited to approximately 70 companies. Still, according to Kuppens, the change is less significant than it may seem, because the largest 70 positions already account for 45% of the total equity portfolio under current policy.
According to the fund, 70 companies are also more than enough to provide sufficient diversification within the portfolio. “Research shows that 60 companies already offer sufficient diversification against idiosyncratic company risks,” said De Graaf.
The transition to a compact investment portfolio is taking place gradually. Recently, the first portion of shares was sold and new positions were purchased. This transition is expected to be completed in the autumn of 2025.
The GP fund has appointed a new asset manager to manage the portfolio, in consultation with its ‘coordinating asset manager’ Achmea Investment Management.
Kuppens declined to name the asset manager that will run the portfolio, and declined to say which companies will remain in the fund’s portfolio, and which will be sold.
An overview of the new portfolio will be published on the scheme’s website later this month, Kuppens said.
No benchmark
The new portfolio will not have a benchmark, although, according to Kuppens, the pension fund will continue to “compare with the broad market”.
Despite this, Kuppens does not want to speak of active management. “In principle, it will be a buy-and-hold portfolio with an investment horizon of at least 10 years. We are also going to monitor this strictly,” she said.
Another point of attention is concentration risk. For example, the fund does not want to invest too much in one particular country or region. That is why the US, which accounts for about two-thirds of the weight in the MSCI All Country world index, has been given a lower weighting in the portfolio.
The new manager has been given a number of additional guidelines for managing the portfolio, but will also have the freedom to buy and sell stocks as they see fit within these guidelines, according to Kuppens.
“We want the manager to look at four aspects of each company. First of all, there is the financial perspective. The second point is the social footprint: a company must limit the negative impact it has on the environment and on society. Third, we only want to invest in companies that have the potential to change and will still be a good investment in 10 years’ time,” Kuppens said.
The fourth and final guideline is a good spread. She added: “It is important that you have a few companies in each sector, but that you do not become too dependent on one particular kind of company.”
Reputational risk
According to Kuppens, the management costs of the new portfolio will go up slightly. This must be offset by a slightly higher return, because the GP fund demands a similar return as achieved with the old index portfolio. Whether that goal will also be achieved in practice remains to be seen.
In any case, the approach chosen by the scheme is not without risk. This was shown by the Swedish pension fund Alecta, which suffered billions in losses last year due to investments in American banks and an investment in a Swedish real estate firm that turned sour.
The pension fund for the Dutch public transport sector Rail & OV already has a number of years of experience in managing a concentrated equity portfolio. The fund said in its recent annual report that the return on investments must be assessed “over a longer period of time.”
The fund said this in response to an underperformance of 8.3 percentage points last year, as a result of the fact that the fund is significantly underweight large US technology stocks. In the same annual report, however, the fund points out that it beat its broad equity benchmark by 5.1 percentage points in the previous year.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication.
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