The €12bn pension fund for the phone and internet provider KPN has switched its passively managed European equity portfolio to a best-in-class mandate.
The scheme now only invests in the 25% most sustainable companies in each sector, explained Jan-Maarten van Osch, president of the fund’s investment commission. “This way, our investments are a lot more sustainable, but we still have sufficient diversification,” he said.
The portfolio’s benchmark is the MSCI Euro SRI index.
KPN is only the latest Dutch pension fund to make the switch to a best-in-class approach for (part of) its equity portfolio. In recent years, the likes of civil servant scheme ABP, healthcare fund PFZW and the metal sector funds PMT and PME took similar steps, among others.
For now, the KPN fund has no plans to introduce a best-in-class approach for other regions in its equity portfolio, which is managed actively through multi-manager mandates.
These mandates, however, already have “a focus on sustainability”, said Van Osch. “In the rest of our equity portfolio we also want to invest more sustainably than the benchmark,” he added.
KPN’s fiduciary Aegon Asset Management is responsible for the monitoring of these mandates and for the implementation of the fund’s new goal to reduce the carbon footprint of its equity portfolio by 35% in 2030.
The pension fund is also working on increasing its allocation to private equity. It has a strategic allocation goal of 4.5%, but at the end of 2019 the fund invested only 1.7% of its total assets in the asset class, up from 1.2% a year earlier.
“Building up this allocation, which we started in 2017, simply takes time,” according to Van Osch, who could not say when the fund expects to reach its strategic allocation goal.
Increase in costs
The fund is, however, already paying fees to its private equity managers on all the capital it has committed to them. This helped drive costs up from 0.38% of assets under management in 2016 to 0.55% in 2019.
“We have indeed increased our allocation to illiquid investments [the fund has also increased its investments in mortgages] and most of the portfolio is being managed actively,” said Van Osch.
In 2019, the fund’s investment return totalled 18.3%. However, because interest rates declined at the same time the fund’s liabilities also increased. This explains the fund’s coverage ratio only increased modestly from 114.1% to 116.9%.