Dutch public transport fund trims concentrated equity holdings

After two years of substantial underperformance in developed market equities, Pesioenfonds Rail & OV has reduced the weight of its actively managed concentrated equity portfolio.

“We have decided to reduce the allocation to active fundamental management within the equity portfolio in favour of a passive mandate. This has been done to reduce the relative risk compared to our benchmark,” a spokesperson for the pension fund for the public transport sector commented.

Rail & OV has some €25.7bn in assets under management for nearly 113,000 members.

The decision follows two years of underperformance relative to the benchmark, which is a combination of the FTSE Developed Index and the FTSE Developed Multifactor Index (value, quality, volatility, size and momentum), both excluding South Korea, real estate stocks and some excluded companies based on the fund’s ESG policy.

U-turn

According to the pension fund’s annual report, underperformance in 2024 was 5.4 percentage points. Rail & OV’s accountability body (an advisory body made up of members) “regrets this deviation”, which came after a similar underperformance in the previous year, it said in the annual report.

In 2022, the fund outperformed its benchmark by 3.7 percentage points.

After the pension fund’s board indicated in the 2023 annual report that “the relative return should be assessed over a longer period”, it noted a year later that the choice for active investment “has not turned out favourably”.

The continuing criticism appears to have spurred the board into action, prompting it to reduce exposure to the actively managed part of the portfolio in 2024. The fund declined to say by how much the active exposure has been reduced.

The large deviations from the benchmark have mainly been caused by the fund’s underexposure to large US technology companies, which generated exceptional returns in recent years.

Rail & OV has been running an actively managed strategy for over a decade. In 2010, it reduced the number of shares in this portfolio from over five hundred to less than eighty. Most recently, the strategy contained about 60 companies.

The Dutch pension fund for doctors has been running a similarly concentrated portfolio since the end of last year. However, this fund decided to go all-in immediately and ditch index-based investing completely, a decision which has been widely debated in the Dutch pension sector.

Second manager

The fund also appointed a second external manager for the management of its concentrated equity portfolio to improve diversification. However, the fund did not provide details on how exactly this changed the management of its concentrated portfolio.

The pension scheme also runs a passively managed multi-factor portfolio.

According to the 2023 annual report, the ratio between the two portfolios was 50/50 at the end of that year. According to the Rail & OV spokesperson, that ratio is still the same, but “within the fundamentally managed part of the portfolio, a part is now passively managed”, he said.

It is expected that this adjustment, at the end of 2024, will bring the result more in line with the benchmark.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra