Disturbing the Dutch calm
Asset managers in the Netherlands are jostling for position and clients in an increasingly crowded market. Interest in alternatives and the continued switch from domestic to European and global assets have sharpened managers’ wits. Not that this is bad. Now threatening the status quo is the imminent move by pension funds to branch out into third party asset management. Dutch industry pension funds are mighty enough, but there is talk they are increasing economies of scale and cosying up to one another. Then there are looming Z scores and those industry wide funds performing poorly will soon see a drop in assets. Most asset managers are in for an interesting few years, with new business opportunities combined with greater competition.
Historically, the large Dutch asset managers have had the market pretty much cornered. “In the Anglo Saxon approach, people like to have a small entity running a mandate for them. In Holland they like the stability of a large entity behind them,” says Maarten Zant, principal at Palladyne Asset Management, part of UAM recently acquired by Old Mutual. In other words, the likes of ABN Amro, ING and Robeco have found it easier to scoop the larger mandates. Passive managers aside, the evidence suggests this remains so but there are increasing foreign managers, active and passive alike, beefing up their Dutch operations.
There are mixed feelings about the prospects for foreign managers. Maarten Slendebroek, managing director of Benelux at Merrill Lynch Investment Managers, says that as a foreign manager, you are given a totally fair hearing when you pitch for business. This in itself is a change from 10 years ago. According to Hans Goossens, director of institutional marketing at Fidelity in the Netherlands, when foreign managers first came to the market, pension funds were relatively reluctant to use them. A few years on and the top 50 or so pension funds now automatically consider a foreign manager. The most recent and high-profile entrant to the market was US asset manager Vanguard.
There are other local managers who feel that the size of the Dutch market, although significant, is misleading. “People overestimate the actual size of assets and the possibility of getting the money in… If you look at the sizes of the ABPs and PVFs, they are very substantial. But, as they are doing a lot in-house, what is the actual chance of getting any mandates there?” says Zant. And, says Quirine Langeveld, head of institutional asset management at BNP Paribas asset management: “because it’s such a mature market and because so many managers have been here since the 1990s, those who are starting to market here now might find it a tough nut to crack.”
Says another rather scathing manager: “We like to co-operate in the Netherlands, to discuss things. We like to reach agreements over things and a typical Dutch culture is important… What you still see is that American competitors are doing very aggressive sales talks along the lines of ‘This is the product. Do you want it or not?’ That is one thing that the Dutch don’t really like. They like to discuss things and to come to some kind of agreement.”
Be that as it may, there are foreign managers doing extremely well. On the passive side there are still enormous mandates coming from the larger pension funds and these tend to be picked up by old hands – the very un-Dutch Barclays Global Investors and State Street.
Such is the success of the former, it has risen to become one of the largest asset managers in the Netherlands with E41bn in asset under management, 99.5% of which are run passively.
According to Marko van Bergen, head of institutional business at BGI, the decision in 1998 by the Dutch government to introduce Z scores (see page 55) is likely to favour the passive investors further. “The Z score has forced people to look at the management of asset allocation implementation, the choices you make – in-housing, outsourcing, active, passive and so on. People are forced to look at their investment much closer and what we have seen is a trend towards more outsourcing at lower fee levels and to a manager that can quantify and deliver on their investment philosophy,” he says. In the past few years the investment horizon in the Dutch market has shortened (see below) and this is likely to favour the passive providers.
Another interesting ‘foreign’ manager in the Dutch market is Lombard Odier, which has had a full office (rather than rep) open for 10 years. Assets under management of Dfl14bn (e6.4bn), for roughly 60 clients, make it one of the largest foreign managers. Lombard recently won fixed income and pan-European equities mandates for the industry-wide fund for pharmacists worth Dfl300m. The group has specialised in fixed income in the EU convergence countries and it recently won a fixed income mandate for Origin pension fund. This is a predominantly international mandate but with significant exposure to central and eastern Europe.
Fidelity is another foreign manager steadily building up its presence and, at the last count, managed around $2.5bn (e2.8bn) in the Dutch market. The group focuses on equity products and deals mainly in high yield and emerging debt on the fixed income side. Goossens says pension funds often look for guidance when it comes to US equity mandates and the group has also picked up a number of Japanese and Pacific ex-Japan mandates. According to Goossens, there are a number of names that keep cropping up for Japanese equity mandates – Nomura, JP Morgan Fleming – for example, but that there is no single foreign manager trumping the rest. It’s his impression that the large, local managers are keeping their clients. New mandates from larger pension funds have gone to foreign managers, in turn growing at a faster rate.
High yield and corporates in the Netherlands are a still relatively small part but, overall, the bond market is changing. At present the European bond market is represented by 70% government bonds and 30% non-government bonds. On the corporate side a lot of this debt is though telecoms. The market is developing in terms of size and depth and at the same time the governments are running budget surpluses and will be less active. Says Jandaan Felderhoff, director of client relations at Lombard Odier: “In Europe the corporate bond sector – investment grade and below investment grade – is not very well developed yet. We believe that it’s a natural process that these markets will develop.” One twist in the corporate bond market is that many Dutch pension funds are exposed to the telecoms companies through equity and fixed income. Returns on fixed income are running at between 6 and 12%. Any equity manager returning the same on telecoms will undoubtedly be pleased.
Merrill Lynch’s Slendebroek believes the high yield and credit markets are of particular interest for managers. Although high yield mandates tend to be smaller at around E50m or so, Slendebroek says there is evidence that pension funds will continue to outsource for these mandates. Average size is on the up and, among other wins, Merrill Lynch picked up a European high yield deal, boosting its assets under management to $3.5bn in the Benelux region.
In another bizarre twist on the fixed income front, the introduction of the euro has naturally led many domestic bond portfolios to be refocused on the European market. According to van Bergen at BGI, this has pressurised the in-house teams of many pension funds to show they have the expertise to run the show. “What we have seen is that the internal team has been renamed specialist and that the core has gone to an external manager, be they active or passive.”
This shift to core/satellite is something Jan Lodewijk Roebroek, executive director of institutional business at Fortis Investment Management has noticed in the large and mid sized pension funds. Fortis is solely an active manager and, on the specialist side, Roebroek says they have seen great demand for specialist US mandates. To pitch for these, Fortis has drawn of the expertise of its Boston-based manager, Harbour Capital Management. At Fortis the demand for investment in alternatives has been relatively muted. “I wouldn’t be surprised if we see more demand for this, the question is at what speed though,” he says.
Similar sentiments prevail in the Netherlands. As in almost every other European country, there is much talk, though less action, about alternatives. At present, 1–2% of institutional assets are invested in them but Robeco expects this to rise as high as 7% within five years. In the Netherlands, it’s the norm for small and medium-sized pension funds to follow the likes of PGGM and ABP and in this sense the omens are good. ABP has announced it is to invest more in alternatives while PGGM has set aside E2bn to invest in commodities. BGI has set up a specialist unit working on hedge funds, Robeco is launching a private equity fund of funds run by the experienced Ad van den Ouweland and Harrie Meijers, formerly with PGGM and ABP respectively.
According to Bas Vliegenthart, Robeco’s head of investments and account management, the group has reorganised into different business units, one of which will concentrate on the development of alternative investments and structured products. Put simply, says Vliegenthart, “institutional managers will continue to broaden their asset base and look for classes with low correlations with traditional asset classes.” Robeco recently suffered a blow when Angelien Kemna left to become ING’s chief investment officer and the sales team is a very different beast than that of a year ago, yet the group has set the ambitious target of topping E400bn in assets under management by 2006. “We take a very different approach to the Anglo-Saxon approach where the star manager system is far more important,” says Vliegenthart.
ABN Amro launched a multi strategy fund of funds approach to alternatives in 1998 and recently hired Gary Smith, Gartmore’s head of global equities to head the alternative investments team. Says Ronald Nagel, head of institutional services: “After five or six years of great returns people are beginning to question whether they can make it with traditional asset classes – fixed income, equities and real estate.” Alternatives have attracted attention thanks to their ability to diversify and Nagel says the move by PGGM and ABP will have a trickle down effect.
Products available at the moment tend to be dollar-based and supplied by US providers but the continental providers are catching up. One of the reasons US products, particularly hedge funds, are preferable is that the markets are more conducive to shorting. Twenty five or so stocks comprise the AEX index, so building significant short positions has been tricky. “Now,” says Palladyne’s Zant, “with the European market as a whole, you have more opportunities to build a long-short product.” The euro also means no currency risk therefore making it easier to hold a market neutral product. More euro-based products seem inevitable and, on the evidence to date, the rush has begun.
More traditional investment managers will welcome this new avenue of income if the ominous suggestions that many larger pension funds are following the example set of the Philips’ fund and entering into genuine, third party management, are correct. Such a move appears logical – the larger pension funds, after all, have the expertise, economies of scale and experience to do so. And if they do, it will be the second nose they put out of joint. According to one local asset manager, there is a messy scrap between the large funds and insurance companies, the latter claiming the former are clubbing together and trying to cross-sell insurance products. Although there is no evidence this is happening as yet, funds are certainly working together. “If you go to the larger end of the pension fund market, you can see all kind of co-operation,” says one local manager. Not that it is exclusively the top end of the market.
The Delft-based Dfl4bn TNO pension fund for the Dutch policy research group and five other funds with total asset of Dfl11bn are building a joint office in Rijswijk, in a move which may lead to joint asset management in the future. The building, due for completion later this year will house the six funds, named as the Productschappen/Pensioenfonds SER & Bedrijfschappen (operating under PBO-Services soon), Stichting Sociaal Fonds voor het Baggerbedrijf in Nederland, Hollandsche Beton Groep’s pension fund, Koninklijke Volker Wessels Stevin’s pension fund, Peek & Cloppenburg’s pension fund and TNO. The extent to which the funds should collaborate on asset management and actuarial services is undecided, but the funds say all possibilities remain open. For the time being the funds’ boards will stay independent but they have agreed to share all administration services.
A more substantial trend is that larger pension funds and those with specialist mandates are using more asset managers. This is a mixed blessing for some of the larger, better-established funds. Says Gerard Bergsma, a member of the management committee at ING investment management, “on the one hand this is a threat because there is a chance that you lose some of your assets. On the other hand it is an opportunity because you can win split mandates from others or you can manage specialist mandates.”
This change goes hand in hand with the increased use of consultants and is also a result of the continued trend to outsource. “Since the introduction of the euro and further globalisation of the financial markets, investing has become more complex and pension funds need a bigger and more specialised staff,” he says. There are admittedly numerous trends at work here and it is tricky to keep a tally of the net balance of ‘in-housed’ and outsourced assets.
According to Zant the larger funds are in fact bringing more and more simple management into the fold while shipping out smaller specialist mandates. In contrast it is the smaller and medium sized funds that are outsourcing more and more mandates. Most have followed the example of the larger funds and are placing greater emphasis on European equities. To call this alien territory is an exaggeration but it is less familiar and requires greater resources.
In addition to the aforementioned alternatives, pension funds are considering investing in sustainable growth, otherwise known as SRI, and Dutch trade unions are pressing them to do so. “At this stage it is a very small percentage of funds in sustainable funds. But we expect that, in a few years time, a significant percentage of the funds will be invested in the sustainable investment funds,” says Bergsma.
One such believer is Bert Hutten, head of consultants CMC and author of the definitive report on SRI in the Netherlands. “Many more institutional investors have put socially responsible investing on their agenda; less have actually invested in it…we think that in the next few years, billions of Gildas will be put into SRI,” he says. ABP has already said it is to put 10% into sustainable funds. Initial evidence suggests that sustainable funds might in fact produce even higher returns. CMC interviewed 72 professional investment managers with a combined Dfl130m invested in sustainable funds and 70% of showed interest in the concept of sustainable investments.
PGGM went one step further at the beginning of the year when it awarded a E5.5bn socially responsible mandate to London-based fund managers Friends Ivory & Sime. FIS will manage the mandate by using its new, so-called reo or responsible overlay programme, designed to work with the companies invested in and to encourage them to improve their attitude towards social, environmental and ethical issues. PGGM’s continental European and passive UK equity assets will also come under scrutiny from the programme
Another interesting development for asset managers (and yet another blow to insurers) is the decision by numerous mid-sized companies to establish their own pension funds rather that re-insuring their liabilities. “They want to be in control themselves and want to have the benefit of the great returns that we have seen in the financial markets,” says ABN Amro’s Nagel. They are consequently starting up their own pension funds in the form of a foundation and then outsourcing it to either asset managers or those providers offering the full pension administration and investment management. Previously most companies felt they had insufficient funds to start their own pension fund- hence the mass of contracts.
Pension funds using such contracts have realised the cost of reinsurance. Typical asset mix also tends to be rather conservative with fixed income commanding a greater premium than equities. Five years of great returns on equities has produced a rethink. By and large this means more is invested in equities and the insurance companies are less than happy about this. “The process has only just started. This is going to be a major trend in the next couple of years,” says Nagel. Despite, that is, the recently atrocious performance of equities. Some companies are likely to think twice about switching but according to Nagel most take a sufficiently long term view to overcome this hesitancy.
Insurance companies are playing a defensive game though. Many have their own asset management companies and are likely to go out to clients whose reinsurance contracts are coming to an end. “They might offer, and they will do, a separate segregated portfolio as well where they do have the total risks and do take the total risks themselves,” says Nagel. ING for example set up ING Pension Services in January, a new entity offering every service imaginable to pension funds- administration and investment management etc and potential clients can select which services they wish.
With regards consultants, they are playing a greater role in manager selection and, of the larger international companies, Towers Perrin, Mercers and Watson Wyatt are having a field day. Frank Russell has a significant presence but that is more on the multi-manager side. Says Nagel: “Until two or three years ago consultants weren’t a major force in the Netherlands. I would estimate that 40 or 50% of new pitches will come via consultants these days and this is likely to increase further.”
Partly explaining this is legislation forcing industry wide pensions funds to get in line with the industry average. Performance is now measured over a five-year rolling period (Z scores). “There is a lot of stress nowadays in terms of investment results. Investment horizons have shortened as a consequence have been shortened dramatically and the investment environment is increasingly complicated,” says Nagel. Hence an increased demand for consultants.
According to one manager, short termism is likely to result in less loyalty to asset managers. “Remember that consultants do take an interest in advising clients to change managers once in a while as they need some turnover themselves,” says one rather cynical asset manager. There is already evidence that there are more and more client reviews – all good business for the consultants.
The big consultants declare themselves to be very busy now on the investment side. There are numerous smaller local consultants carving out a niche for themselves. Lou Ten Cate, an ex-Wilshire man, recently launched Investment Management Factory, a group he wants to turn into a ‘superconsultancy’. Since leaving Wilshire following its decision to concentrate on private equity, ten Cate has worked on the group that he hopes will help pension funds on both sides of the balance sheet – both in terms of asset management and on the benefits consulting side.
Then there’s Bert Hutten at CMC, an independent consultant specialising in manager selection and socially responsible investing. Frits Bosch founded Bureau Bosch, the consultancy renowned for its biannual report on asset managers in the Netherlands. Henk Klein Haneveld used to have a joint venture with Mercers before establishing Klein Haneveld consulting in March last year. There is also AON Consulting and Hewitt, Heynis & Koelman, an outfit with a very strong network. Bert Kiffen’s consultancy, Kiffen International Pensions Advisors advises companies on setting up their own schemes and reinsuring them.
As mentioned above, many medium sized companies have been setting up their own pension funds and, according to van Bergen at BGI the consultants are heavily involved with these deals. It is predominantly mid-sized pension funds giving consultants a lot of work. By and large this is due to a shift out of domestic equities and bonds and into Euro-based assets. In contrast there has been an absence of consulting activity at the top end of the market. “Our impression is that the influence of consultants with the big players is very limited,” says Fidelity’s Goossens. Not that this is anything new. Large funds have historically had the resources to do their own consulting and, since they did most of the asset management in house, had no need for manager searches. Where they have yielded to consultants is on advice on specialist mandates.
If, on the institutional side investors are becoming more adventurous, so is the Netherlands’ Jan Modaal, otherwise known as the man on the street. “You can see a shift in the retail sector,” says Zant, “if you look at the intermediary playing field, there have been some changes in legislation which introduced a shift to asset management- people have become more interested in it.”
Such a change is manna to Palladyne, restructuring and focusing on the retail market following the departure of former CEO Erik van Dijk, who, in Zant’s words, had “strategic differences” with Old Mutual.
Jan Modaal is saving more and there is a feeling the government pension has to give out at some stage. Media coverage of stock exchanges and asset management has proliferated during the 1990s and shows little sign of stopping. Property prices in Amsterdam have doubled in the past five years and many homeowners are mortgaging at more that 100% and investing in the stock exchange and a quarter of the Netherlands 8,000 IFAs now supply financial products.
Although recent trends have been a continuation of previous years, there are changes afoot. Consolidation among pension funds, publication of Z score performance ratings and the launch of new, second pillar schemes promise to shake up the Dutch market. Throw in increased foreign competition and the possibility of larger industry-wide funds moving into third party asset management and you’ve got a genuine recipe for change.