A major theme for pension funds in the 2020s will be the growing influence of politics in the economy, the investment head of one of Europe’s biggest pension investors has said, telling funds they will need to learn more about how politics work.
Speaking during an IPE Nordic seminar, Jaap van Dam, principal director investment strategy at Dutch pensions manager PGGM, said: “My message here is that I think we will be moving back to political economy, which was traditionally the word for economy, in which politics will play a much larger role – and that also means that we have to understand how politics actually work and how they will potentially interfere, interact, with markets.”
Van Dam said the political side of determining how to invest would come to the fore in the next 10 years.
This would happen as part of the current decline of the liberal international economic order, he said, with this decline being marked by trade wars, the potential for higher or lower inflation, populism and the extreme dispersion of wealth between people.
“And I think COVID is probably a catalyst for this decline,” he said.
PGGM’s main client is the €240bn Dutch healthcare sector pension scheme PFZW.
Talking about changes he expected to see, Van Dam indicated portfolios could become more domestically focused.
In the last few decades, pension funds in the Netherlands had taken advice to diversify investments internally very seriously, he said.
“When we invest more than 1.5% of our return-generating assets in the Netherlands we say, well, this is a concentration risk, but I find that a bit overdone.
“I would say if you can financially contribute to your home turf, why shouldn’t you? It generates jobs, it generates wealth for the local people – that’s perhaps not a direct pension benefit but it is a societal benefit,” he told the virtual event’s participants.
“It should be very clear this goes within the financial borders, but I think at least in the Netherlands we’ve overdone this international diversification a bit,” he said.
Asked whether pension funds would increasingly compete with each other for assets, given the current era of return compression and increased allocations to private markets, van Dam agreed.
“I’m afraid the short answer is yes, and that’s been already been going on for quite some time,” he said. “A lot of money is hunting scarce deals.”
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