Dutch pension funds and their asset managers are sticking to their rebalancing policies within their strategic asset allocations, despite market volatility and falling interest rates.
Many schemes will buy additional shares if equity markets remain at the current low level, several asset managers and pension providers have said.
However, pension providers are keeping their cards close to their chest as they try to keep other market players in the dark about their intentions.
“Making statements could unnecessarily inform the market and can harm the position of our clients,” said asset manager PGGM, whose clients include the €238bn healthcare scheme PFZW.
During the past weeks, the ratio between pension funds’ matching and return portfolios has gone out of proportion relative to their strategic asset mix. Equity holdings in the former had dropped due to fear of the impact of the COVID-19 virus, and the value of the many bonds in the latter had risen as a result of falling interest rates.
“As soon as the ratio deviates more than 5% to 10% from the norm portfolio, pension funds can start rebalancing,” said Michel Iglesias del Sol, head of investment strategy at Kempen Capital Management.
“Some implement this in a gradual process, others in one go, whereas some schemes wait, for example because of a low funding and because they want to reduce the risk of rights cuts.”
Twan van Erp, head of strategic portfolio advice at Achmea Investment Management, said that many pension funds didn’t need to rebalace at the end of February, “as equity had risen significantly ahead of the recent drop”.
“This meant that, on balance, the investments had usually remained within the agreed bandwidth,” he said. “However, further declining markets since February-end had increased the likelihood that schemes must rebalance at the end of this month,” he added.
In his opinion, deviating from the current strategic investment policy would only be appropriate in case of a totally new economic scenario. “Despite the economic impact of COVID-19, this isn’t the case yet,” he said.
According to Van Erp, trustees prefer to stick to their policy because of the long-term focus of pension funds. “We also advise to hold on to the existing rebalancing policy.”
Kempen’s Del Sol agreed by saying that current circumstances do not necessarily make investors doubt the basics of long-term investment, like the last financial crisis did.
”Most pension funds rebalanced last year by selling equity,” he added.
According to Ivo Kuiper, Kempen’s head of investment allocation, pension funds usually rebalance their asset mix once a year, and only deviate from this frequency if bandwidths have been crossed.
“They want to minimise rebalancing in order to save transaction costs,”
Ivo Kuiper, head of investment allocation at Kempen Capital Management
“They want to minimise rebalancing in order to save transaction costs,” he noted, adding that the philosophy behind rebalancing is what improves long-term returns.
“You take your profit when the markets are high and sell when the valuations are low.”
APG, the asset manager for the €465bn civil service scheme ABP, said it will also stick to its rebalancing policy.
An APG spokesman said: “Rebalancing a portfolio to the risk profile that is necessary to achieve a long-term goal gets its strength from consistent implementation.”
He added: “There must be very good reasons for deviating from this. The turmoil in the markets in the recent period, including the coronavirus, certainly has a major impact on the economy, but not in such a way that we think that adjustment of the rebalancing policy is needed.”
ABP applies a bandwidth of 3% for its strategic holdings within equity developed markets.
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