A pension fund can sell and reinvest all its investments in fossil fuels in less than two months, according to PME’s Marcel Andringa. The ensuing change in the risk profile of a scheme’s investment portfolio is negligible, he said.
PME made history a few weeks ago when it became the first Dutch pension fund to divest completely from fossil fuels.
The pension fund for the hospitality industry Horeca & Catering made a similar announcement a day before PME, but it is holding some €80m in high-yield bonds issued by fossil fuel firms for now. The fund has sold all of its shares in fossil fuel firms though.
Bas van Ooijen, investment manager at Horeca, said the fund is still holding on to the bonds because it hasn’t yet decided what to do with its high-yield bond portfolio after the divestment decision.
“As bonds of oil and gas firms form a relatively large part of the current high yield portfolio, the divestment decision has a significant impact. We do not yet know how we will redesign our current global high yield mandate,” said Van Ooijen, who expects a decision on this to be taken shortly.
The divestment delay has nothing to do with a possible lack of liquidity in high yield markets, Van Ooijen noted. “We’re not a very large investor, so it shouldn’t be too much of an issue for us to sell our bonds in a short period of time.”
PME sold all its oil and gas investments over the summer, in a period of six weeks, said Marcel Andringa, executive director for investment management at the pension fund for the metals and electronics sectors.
“We took the decision at the end of June, and had divested completely by mid- August,” he said.
It only took the fund a few days to sell all its shares in oil and gas firms. “It’s not that complicated to sell €400m worth of stocks. Even over the summer this could easily be absorbed by the market. Because we had already reduced our allocation to the oil and gas sector to just 1.7% of our equity portfolio a few years ago, we could execute the divestment during our regular quarterly portfolio rebalancing exercise,” explained Andringa.
PME took more time, however, to overhaul its bond portfolio. Andringa added: “Our fixed income mandates are managed by several external managers. Together with them, we determined how much time they needed to sell all oil and gas investments. In US high yield, for example, it would be too ambitious to try and sell within a few days.”
Not only is liquidity there lower than in equity markets, which drives up transaction costs when selling large tranches of shares at a time. The oil and gas sector also makes up a relatively large part of the bond portfolio.
“In US high yield, about 17% of our investments were in oil and gas. Besides, we also wanted to give our managers sufficient time to keep transaction costs low and sell the securities at an optimal price,” he continued.
None of the four underlying external managers – DDJ Capital Management, Mackay Shields, Oak Hill and Post Advisory Group – had any practical experience in divesting from fossil fuels, according to PME.
“And our managers would not have suggested to take this step out of their own initiative,” said Andringa. “But they did not try to discourage us from it either. In the end, their job is to implement our instructions with regard to the investment mandate.”
PME’s general director Eric Uijen stressed earlier that excluding oil and gas investments would not impact expected returns negatively. But Nick Stansbury, head of climate solutions at asset manager Legal & General Investment Management (LGIM), said that divesting from fossil fuels did change the risk profile of a portfolio.
According to Stansbury, who despite his job title does not support divesting from fossil fuels, portfolios without it are less well diversified and more sensitive to inflation risk.
“Oil and gas investments do relatively well in periods of high inflation. This way they offer a natural inflation hedge. By excluding the sector you also give up this hedge,” he said.
In certain investment categories, and especially in US high yield, oil and gas firms are so dominant that excluding them will inevitably change the risk profile of a portfolio. “Exclusion is possible, but it’s going to be hard to keep things like average duration, credit rating and yield constant,” noted Stansbury.
The risk profile of PME’s high yield portfolio indeed changed post divestment, Andringa confirmed. “The oil and gas firms tend to be higher risk investments so yields are higher. The average yield in our portfolio is now 10 to 20 bps lower than before. But on the other hand the average ESG and credit rating has gone up.”
However, the effects of divestment are negligible on total portfolio level, he claimed. “Oil and gas is somewhat more volatile, but overall the effect of divestment has been very small.”