The decision for the Dutch pension fund for doctors (Pensioenfonds Huisartsen) to invest in only 70 companies in its equity portfolio is being praised as brave, but is also criticised from within the pension sector because of the high risk of significant deviations from the market.
IPE asked pension consultants, a scientist and a director of another pension fund to comment on the decision to move to a concentrated portfolio, which the doctors fund announced earlier this month. All questioned are critical of the pension fund’s decision.
In a post on LinkedIn, finance professor Rob Bauer of Maastricht University already listed a series of objections to the decision. His main point of criticism is that with only 70 companies in a portfolio, there is a great risk of not being able to keep up with the market, especially in the longer term.
“Seventy companies are a really low number. This is going to result in huge performance deviations,” Bauer told IPE.
In particular, the combination of 70 stocks with a buy-and-hold strategy is risky, he continued, adding: “You run the risk of investing in the old economy and, so to say, missing out on the Nvidia of the future.”
Chipmaker Nvidia is the world’s most valuable company today, but it only went public in 1999. Since 2001, it has been part of the S&P 500 index, where it led a fairly average life until a few years ago. Over the past two years, its share price suddenly exploded, increasing almost tenfold.
Diversification
The finance professor also questions the pension fund’s claim that 70 shares is more than enough to eliminate individual company risks.
Bauer said: “The studies that conclude this are based on data from the US. In a global portfolio, you have to invest in more companies, In addition, you now have to respond to all kinds of changes much more than before. Just think of the rise of the internet and AI.
“As a result, the top 10 of the largest companies in the world look very different now than 10 or 20 years ago, and will probably look very different in 10 years’ time again. I would say: it would be better to take three hundred to five hundred shares in such a portfolio.”
Criticism comes not only from academia, but also from other pension fund executives. Chief investment officer Marcel Roberts of SPMS, the occupational pension fund for medical specialists, agrees with Bauer.
“My biggest concern is that, by concentrating on 70 companies, you will miss out on all those other 7,000 companies. There is a chance that something will happen in the world that will cause you to miss a new trend and cause you a problem. If you look back 10 years, would you be invested in the companies you would have chosen then? I hope for the participants that this works out well. This strategy may work in the short term, but certainly in the long term it comes with risks.”
Roberts himself has had a bad experience with investing in concentrated portfolios for pension funds from his time as an investor at Achmea Investment Management, he noted.
“We started doing this at the beginning of this century. It went well for three years, but if the returns lag behind for a few years, it gets difficult. We had only selected companies that we were really convinced of. That makes it difficult to say goodbye to your stock picks, with the result that we held on to certain investments for too long,” he added.
Pension consultants are also critical. “This is quite a risky strategy by the pension fund,” said an investment adviser who requested anonymity. However, the change in strategy of the doctors fund does fit in with a trend, the consultant added.
“We do see that large pension investors are moving to more limited portfolios, but what the doctors [fund] is doing, going back to a portfolio of just 70 companies, is really unique.”
Communication problem
The main reason for the GPs pension fund’s new investment strategy was not a better expected return, but the fact that it’s easier to explain a portfolio with a limited number of companies to members. However, a concentrated portfolio creates yet another communication problem, noted Bauer. “You will then have to explain to participants why the portfolio has become so much more volatile compared to the broader market.”
Still, amid all the criticism there is also some admiration. “I certainly see the risks that you can lag behind the market. But it will be a very transparent portfolio that you can match very well with what the participants want. And this fund is sticking its neck out by no longer taking the broad market index as a frame of reference,” said Sander Gerritsen of Montae & Partners.
“I do think that’s admirable, but I don’t dare to predict what will be the outcome of it,” he added.
Doctors fund reacts
In a response to this article, the pension fund for doctors told IPE it is moving to a concentrated portfolio because the fund wants to be sure it is making “responsible choices” with regard to its investment policy.
The fund said: “We select socially relevant companies with the aim of realising both financial and social value in the long term. In doing so, we do not compromise on risk diversification and returns. We do not want to follow fads and want to be less sensitive to market bubbles.
“For every investment, we want to be able to explain why we are investing in it. Therefore, after a long and thorough decision-making process, we have chosen this approach for our equity portfolio (25% of the fund). Every investment strategy comes with risks, both financial and reputational.”
It added: “For our new approach, we have mapped these extensively and made our own trade-offs in them, which suit our participants. We are always open to discussions with colleagues from the pension industry, to talk about the differences in strategies and learn from each other’s views.”
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