Performance fees propel ABP investment costs above €3bn

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Dutch civil service scheme ABP has seen its investment management costs rise above €3bn for the first time. An increase in performance fee payments accounted for the bulk of the rise.

Performance fees, which were mainly paid to private equity and hedge fund managers, rose by a third to €1.5bn in 2020. This means performance fees accounted for approximately half of all investment management costs at the €499bn pension fund.

The bulk of the performance fees (€936m) were paid to private equity managers. Private equity was by far the best performing asset class for ABP last year, returning 21%.

Hedge fund managers also pocketed €331m in performance fees even though the performance of the asset class was less than overwhelming at -4.2%. ABP said some hedge fund managers were nevertheless owed performance fees because their returns were positive when measured in dollars.

Transaction costs also rose by €101m to €532m because of higher transaction volumes and higher spread costs due to the coronavirus crisis. In a recent interview, the CIO of ABP’s asset manager APG said his firm increased trading in March last year to take advantage of market dislocations.

Another reason for the higher transaction costs was the growth of APG’s internal real estate and infrastructure portfolio.

ABP is increasingly transferring the management of alternative assets to APG in order to avoid having to keep paying large amounts of money in investment management and performance fees.

APG has hired several dozen new employees for its illiquid investment division in the past two years. “By concentrating asset management activities at APG excessive costs of funds-of-funds in private equity and hedge funds are being reduced,” ABP said.

Thanks to the rise in performance fee payments, total investment management costs as a percentage of assets under management also rose by 9 bps to 0.78%. This is somewhat higher than the average for Dutch pension funds, which stood at 0.49% in 2019 according to regulator De nederlandsche Bank (DNB).

ABP is one of few funds that retain an active investment style.

Pension changes

While investment management costs rose, ABP’s administrative costs dropped by €1 to €67 per (active and retired) member.

The trend of lower costs will be reversed from this year, however, ABP warned. This is a result of upcoming IT investments ABP’s pension service provider APG has to make to prepare for the upcoming change to a defined contribution pension system in the Netherlands.

Last year, APG’s former CIO Gerard van Olphen said his firm would invest up to €100m in the pension transition until 2026. ABP was not able to say by how much it expects costs to rise.

CO₂ reduction

In other news, ABP announced it has already reached its target to cut CO₂ emissions by 40% compared to 2015 last year, five years earlier than planned.

A spokeswoman for ABP told IPE this is because portfolio companies have reduced their emissions more quickly than expected.

“Besides, we concentrate our investments in companies that emit relatively few CO₂ compared to their peers. On top of this, carbon footprints were also temporarily lower in 2020 because of the COVID crisis,” she added.

In 2022, ABP will reveal a new, more ambitious CO₂ target that it promises to be in line with “expectations of the Dutch Climate Agreement” which promises to reduce CO₂ emissions by 49% compared to 1990 levels by 2030.