Higher performance fees for private equity managers and a doubling of transaction costs drove up total investment management costs of PME, the Dutch pension fund for the metals and electronics industry.
Investment management costs increased by €60m, or 28% to €276.4m compared to 2019, according to the €61bn fund’s annual report. Total investment management costs rose from 0.41% of assets under management to 0.49% in 2020.
Almost half of the cost rise could be attributed to transaction costs, which were “considerably higher than in previous years”, PME signalled.
The fund attributes the cost rise to an increase in transactions in fixed income as well as the exceptionally high spreads in February-March due to the outbreak of the coronavirus crisis.
PME’s sister fund PMT, which also uses MN as its asset manager, reported a similar rise in transaction costs in its annual report that was published earlier this week.
The second reason for the cost increase was an increase in performance fees paid to external managers. Performance fee payments almost doubled to €78mn, thereby exceeding the amount of money paid in fixed management fees for the first time.
The bulk of the performance fees were paid to private equity managers. Some 8.21 percentage points of the 27% return on private equity was paid in performance fees and management fees to the underlying managers. This reduced the net return on the asset class to 18.8%.
PME expects investment management costs to rise further in the coming years as allocations to illiquid and relatively expensive investment categories such as private equity and real estate will be increased.
The fact that total net returns dropped by 8.4 percentage points compared to 2019 makes the increase in investment management costs only more striking.
All asset classes showed a worse performance compared to last year, with the exception of private equity. PME’s portfolio of real assets, including forestry and infrastructure investments, showed the worst performance, recording a return of -4.9%.
Misleading CO2 reduction claim
In a press release accompanying its annual report PME incorrectly stated that it had managed to reduce the carbon emissions of its equity portfolio by 53% since 2015.
A review of the fund’s annual report showed, however, that the reduction claim of 53% in fact related to the CO2 emissions per €100 of invested capital by PME.
The actual reduction of CO2 emissions of the portfolio since 2015 was only 23.9%, another calculation provided in the annual report showed. PME realised the bulk of its reduction in CO2 emissions in the past five years by halving its investments in fossil fuel companies.
The difference between the two CO2 emission reduction figures can be explained by the increase in market capitalisation between 2015 and 2020 of the companies PME invests in.
Responding to a question from IPE on the matter, the pension fund acknowledged share price rises such as those in 2020 could indeed lead to a reported reduction of CO2 emissions under its chosen method.
The fund claimed it did not mean to sow confusion. “By reporting the outcomes of several different methods to calculate reductions in carbon emissions, we hope to provide insight to as many stakeholders as possible, including NGOs and the government,” a spokesperson told IPE.
She added PME was sorry for the “unintended confusion” caused by the “blunt” emissions claim.
More impact investments
Separately, PME increased its impact investment goal to €3bn by 2025. It currently has €1bn in investment with a positive impact.
The fund will concentrate its future impact investments in the energy transition, the circular economy, affordable housing, healthcare and innovation in the Netherlands and Europe.
The latter category includes a €100m investment in a technology fund run by Innovation Industries, which focuses on local technology start-ups.
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