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Asset Allocation: The Dutch top five

The number of Dutch pension funds has halved in the past 10 years. Yet five funds – ABP, PFZW, PMT, BpfBOUW and PME – account for over 50% of total pension assets. Leen Preesman reports

ABP: benefit from active management
ABP, the €356bn civil service scheme, credited its active investment policy for the outperformance by 45bps of its investment portfolio in 2014. It said that since 2010, it had generated €12.4bn in additional net returns thanks to active management.

Contrary to other pension funds, ABP has said it will not divest from hedge funds, an asset class that has delivered a net return of 9.9% on average over the past five years. Last year, hedge funds returned 17%, with relative-value arbitrage, equity-driven and corporate distressed debt the best performing strategies.

The scheme reported a net return of 14.5% for 2014, including 3.9% thanks to an interest hedge of 25% of its liabilities. ABP made clear that it would stick to this ratio for 2015, saying that it did not want to chart its course with reference to current interest levels because of its long-term focus. A full hedge would hamper indexation potential in case of a strong rise in inflation.

Having achieving a return of 26.5%, the scheme’s 10% property allocation was the best-performing asset class. Tactical asset holdings – in listed property companies and funds – generated 31.1%. The pension fund attributed the 23.3% return on its 5% private equity portfolio largely to good conditions for the listing or sale of companies, following the rise of the dollar relative to the euro.

ABP asset allocation (Q2, 2015)

ABP continues to invest in Chinese real estate. In a joint venture with the Canadian property firm Ivanhoé Cambridge it recently acquired a €822m stake in Chongbang, a Shanghai-based retail property developer and manager. In 2014, it committed €589m to the logistics developer e-Shang, also based in Shanghai. The investments fit the strategy to raise ABP’s stake in city-specific platforms in important urban centres.

The fund indicated that its fully sustainable investments amounted to €29bn – 8.5% of the portfolio – and that it wanted to further increase its sustainability target, including “measurable goals”. These efforts are to include doubling ABP’s stake in renewable energy to €2bn in the coming years.

In a joint venture with German firm Aquila Capital, ABP further increased its stake in Norwegian hydro-power plants, a long-term infrastructure investment as well as an environmental, social and governance (ESG) target for the fund. 

PFZW: Hedge funds prove an investment too far
In January 2015, the €166bn healthcare sector pension fund PFZW divested almost its entire holdings in hedge funds, after concluding that they were expensive and complex, and scored badly on sustainability. However, the scheme suggested that it may still follow passive “hedge fund-like strategies” – understood to refer to factor-index strategies. Following this decision, PGGM, PFZW’s asset manager, said it was considering selling the hedge fund-managed account platform it launched in 2010.

PFZW is maintaining its private equity investments. As part of a consortium with sovereign wealth funds and Goldman Sachs Merchant Banking Division, PGGM bought a minority stake in the Dutch car lease firm LeasePlan in a €3.7bn transaction in July. This co-investment in LeasePlan fits the pension fund’s strategy to cut costs, and to remove middlemen. The fund’s 6% private equity portfolio returned 15.6% during the first half of 2015. 

PFZW says it will continue to invest in fossil fuels, “as these are still needed for economic development and transport”. About 7.5% of its assets are exposed to coal, oil and gas, although the fund says it is engaging with carbon-based firms to persuade them to switch to cleaner technologies.

PFZW asset allocation (Q2, 2015)

The healthcare scheme wants to quadruple its 3% stake in climate change solutions as well as against water and food scarcity within five years. It also wants to halve the carbon footprint of its investments in this period.

Last year, the pension fund decided to  reduce its interest hedge slightly to 46%, because of low prevailing interest rates. As it was underfunded at the time it had to compensate for the increased risk by replacing equity with short-term government bond holdings.

PFZW returned 15.5% during 2014. A first-half result of 2.1% in 2015, in combination with a reduction of the ultimate forward rate, led to an official funding rate of less than 102% in July. 

As the minimum required coverage ratio is 105%, the fund had to submit a recovery plan. PFZW anticipates granting partial indexation in 2018; under the rules of the new financial assessment framework (nFTK), pension funds can start granting inflation compensation at a funding level of 110%.  

PMT: a new investment framework
PMT, the €63bn pension fund for the metalworking and mechanical engineering sector, has developed a strategic investment framework, focusing on achieving  an indexed pension through extra annual returns of 1.5% relative to its liabilities.

The investment structure involves a redesign of the scheme’s return portfolio, which is to be rearranged into three clusters of asset classes: property, equity and high yield, according to Inge van den Doel, the fund’s chief investment officer. These three groups are to make up 20%, 60% and 20% of the return portfolio.

Compared with the current asset mix in the return portfolio, the property allocation – 16% at present – is to be increased, at the expense of high-yield and equity investments. The real estate investments are meant to improve the stability of the overall investment result. In the new set-up, the matching portfolio – aimed at covering its liabilities – is to contain a larger exposure to residential mortgages.

However, the metal scheme’s return target will initially be essential for its recovery plan to achieve the required financial buffers, a funding level of 120%. The coverage ratio currently stands at 100.2% against the minimum of 105%.

Van den Doel says she does not expect that the critical level of 110% – above which the pension fund can start granting limited indexation – will be reached within the next five years.

PMT asset allocation (Q2, 2015)

The fund says it will stick with passive management and that it will apply this approach in part to emerging markets equity. “We can reduce our active management there, as markets have become sufficiently liquid,” says van den Doel. PMT will refrain from tactical investment: “Predicting market movements for the shorter term is not the right basis for a prudent investment policy.”

To minimise the number of links in the asset management chain, van den Doel says PMT prefers “transparent and physical investment products to synthetic constructions with built-in leverage, such as complicated derivatives”. As the largest private sector scheme in the Netherlands, it says it wants to invest through segregated mandates, rather than through funds.

However, it will make an exception for private equity and international property, “as these asset classes do not offer the option of an individual mandate”. The fund says it has developed the investment framework because of the new joint pension arrangements with the €43bn metal scheme PME, as well as the implementation of the new financial assessment framework (nFTK).

BpfBouw: in best shape
Despite losing most of its 11.9% first-quarter growth during the second quarter, BpfBouw, the €48bn pension fund for the building industry, is still in the best financial position of the five largest Dutch funds.

I ts official funding ratio was 114.1% at end-June. However, July’s reduction of the ultimate forward rate cost 0.3 percentage points of the coverage ratio.

The fund’s assets increased by 24.5% over 2014, chiefly because of falling interest rates on the fixed-income portfolio and the 65% interest hedge. However, in the wake of this rapid increase, the fund scaled back its tactical real estate allocation by 1 percentage point to 16%, as it struggled to expand its portfolio. 

Even so, David van As, the scheme’s director, says, BpfBouw will stick to its long-term target allocation of 20%, which includes a 1% allocation to real estate in the equity portfolio. 

BpfBouw asset allocation (Q2, 2015)

The expansion of the property portfolio comes at the expense of fixed-income holdings, which are to be reduced to 42%. The equity allocation will remain at 27%.

The scheme plans to invest €500m in existing Dutch property as well as in redevelopments in attractive areas through its own property investor Bouwinvest. It also expects to allocate €100m abroad through local partners, and has set aside €300m for investments in the residential care property sector.

BpfBouw has also reduced its strategic commodities allocation to 3%, as the planned pace of expansion was overtaken by the growth of its assets. Last year, property holdings returned 8.8%, while fixed income and equity returned 12.5% and 18.1% .

Key details 5 largest Dutch pension funds (Q2 2015)

PME: portfolio simplification to drive down costs 
PME, the €40bn pension fund for the metal and electrotechnical engineering sector, continued to simplify its investment portfolio to drive down costs. After divesting its “expensive” hedge funds holdings, it ceased investing in commodities  during 2014. The fund says its asset management costs have fallen since 2010 from 85bps to  39bps.

The metal scheme shifted the focus of its international indirect property portfolio to relatively low risk core funds that usually invest in fully rented property and keep leverage to a minimum. PME has adopted a largely passive investment strategy for its equity investments and will only make an exception for active management if it adds “sufficient value”.

Last year, PME increased its fixed-income and equity allocation at the expense of its high-yield, real estate and private equity holdings. It again committed funds to private equity, after agreeing a fixed fee with managers. Its 2% private equity holdings returned 11% in 2014.

PME has halved its allocation to liquid assets to 2% as it expects to need less liquidity in future to finance liabilities from derivatives positions. Securities can now be used as collateral, following amendments to counterparty contracts, the fund says.

The scheme returned 17.8% in 2014 but saw 2015 first half returns slashed to 2.1% following a second-quarter loss of 7.2%. Its official policy funding ratio – the 12-month average of the market funding with the application of the ultimate forward rate – stood at 101.1% in July.

PME asset allocation (Q2, 2015)

Hans van der Windt, the scheme’s former CEO, who has retired and has been succeeded by Eric Uijen, said at his farewell reception that he could not see any obstacles to a full merger with the €63bn metal scheme PMT. 

Since the start of 2015, both pension funds share the same pension arrangements and a joint ICT system, which is expected to slash administration costs by one-third to about €60 per participant. However, the two funds have yet to publicly announce concrete steps.

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