The Netherlands: All eyes on the homeland
The creation of the National Investment Institute (NII) and National Mortgage Institution (NHI) has generated much debate among the Dutch institutional investment community. There is no legal arm-twisting but there is a push towards investing in domestic assets. This goes against the global investment grain, but investors are willing to consider local projects as long as the investment case can be made.
The Netherlands is not alone in its attempts to engage pension funds and insurance companies in the local economy. Countries across Europe are trying to unlock institutional capital as banks retrench in the wake of tighter regulation such as Basel III. The NII is seeking funding for small and medium enterprises (SMEs) as well as infrastructure projects, while the NHI plans to package mortgage portfolios into bonds and sell them to pension funds and insurers. They will be backed by the government, which has a triple-A credit rating.
“In the last few years, the calls from politicians and society to Dutch institutional investors to increase their domestic allocation have become louder,” says Wouter Pelser, chief investment officer at the fiduciary manager MN. “The Dutch government has held talks with institutional investors to see under what conditions they may increase their domestic allocation. We were part of these talks and believe that a good risk-return and sufficient diversification must always be key. However, given that these conditions can be satisfied, we take a positive stance towards more domestic investment.”
Domestic assets comprise around 14% or €134.9bn of a total of €960bn of Dutch pension funds, according to a De Nederlandsche Bank (DNB) survey that polled 30 institutions that accounted for 81% of assets under management in the country. Fixed-income, which captured the lion’s share at €87.1bn, included government bonds (€43.5bn), corporate bonds (€14bn), cash receivables (€16.9bn) and mortgage loans (€12.7bn). Domestic real estate was also popular, comprising €21.7bn out of a total of €91.3bn real estate investments.
It is unclear as to whether pension funds will heed the government’s call to raise their allocations. As Jan Bertus Molenkamp, director of fiduciary management at Kempen Capital Management notes: “The pressure at this point in time is more moral than political. That was not the case 20 years ago when the government told the largest pension fund to invest a minimal percentage in the country. Today, the situation is different but pension funds will want to have a good story when investing in domestic assets and be able to fulfil their main goal which is to generate risk-adjusted returns that will pay real pensions to their members.”
Philip Jan Looijen, managing director for integrated client solutions at ING Investment Management also says that one of the issues is that Dutch pension funds are already heavily invested domestically in terms of real estate and government bonds. “We have seen a shift towards alternatives and investing outside the country,” he says. “As a fiduciary manager, I have not had many questions from clients about investing in the Netherlands. It is not a big theme and our responsibility is for the risk-adjusted returns of the portfolio, whether it is in the Netherlands, UK or US.”
Jaap van Staveren, investment strategist with Syntrus Achmea, adds: “As a fiduciary manager, we see arguments on both sides of the discussion for more domestic investment. On the one hand, we see the social responsibility of the pension funds, the stimulus for the Dutch economy, and the longer-term positive effects on the income of pension funds. On the other hand, there is the argument that more domestic investment would lead to concentration risk and the danger of capital misallocation which may lead to bubbles. Some also argue that more concentration leading to less diversification means a less efficient portfolio. In general, many people question how wise it is to invest in fixed-income products in times where interest rates are expected to rise.”
According to van Staveren, the firm tries to incorporate both by using a framework that judges proposals for new investments from a hedging, diversification and risk-return perspective. On top of that, it applies the following constraints: any new investment should be in line with the investment philosophy of the client and new products should never lead to the easing of regulatory frameworks. In addition, investment-related, risk-related and operational criteria a client uses, should also apply. “By using this framework, we aim to select investment opportunities that genuinely have added value for our clients, while at the same time not ignoring the various risks related to this topic,” he adds.
But Pelser thinks that market initiatives such as the NII have the greatest chance of success. “It can help in realising a structural broadening of capital markets by facilitating market initiatives,” he comments. “It can act like a ‘broker’ and help mitigate current shortcomings by bundling, standardising and increasing scale.” MN has been one of the participants along with fellow pension provider Syntrus Achema, banks ABN AMRO, ING and Rabobank, asset manager Robeco and Euronext Amsterdam in creating the NL Ondernemingsfonds, which will initially target SMEs and hopes to raise €1bn to co-finance loans.
“We see this as a strategic, market-led solution to unlock capital from the pension fund market,” says Cees Vermaas, CEO of Euronext Amsterdam. “There is a role for them, because Europe is still dominated by bank funding. They account for about 80% of the funding but they are shrinking their balance sheets. As the national exchange, we took the initiative and brought these parties together. We wanted to get involved and bring demand and capital together, especially as the economy is recovering. This is the first step but, if successful, then we can expand the products and loans.”
Hans Rademaker, CIO and member of the management board at Robeco also believes that it can work from an investment perspective. “Our clients are looking at alternative assets for diversification to reduce risks and generate higher returns, and these elements are in place with the recently launched NL Ondernemingsfonds, which provides loans to SMEs,” Rademaker says. “The negatives are that these loans are less liquid and do not trade on a daily basis until the fund is redeemed or the coupon is paid. This makes it harder to evaluate the market. However, we carefully assess the loans with a team of specialists to ensure high quality for institutional investors.”
There are concerns over the part that the banks will play, but Pelser notes that “co-financing is an important feature of the fund, as this aligns interests with banks”. Furthermore, he says, the company knowledge and credit analysis capabilities of the banks will be useful. “The fund only invests in new loans – therefore, there is no risk of ‘bank balance sheet offloading’. Another important advantage is that because of the intended €1bn size of the fund, the scale is right and costs can be kept at a low and acceptable level.”
Looijen believes that “it is important to have a dedicated asset manager involved in the initiative because many pension funds do not have the skills or resources to manage the portfolio in-house. However, they need to make a compelling case and deliver a transparent structure where the interests are aligned with the interests of the participants.”
The NII may have a better chance with its infrastructure aspirations to raise finance for up to €40bn of projects. A group of heavy-hitting pension schemes and insurers including ABP, the €286bn government workers’ retirement scheme and Europe’s largest pension fund, the healthcare scheme PFZW, metal workers’ scheme PMT, as well as insurers Achmea, Aegon and Delta Lloyd, have pledged their support. However, it will not be plain sailing.
“Larger pension funds are interested in infrastructure but one of the problems from a Dutch angle is that the size of the projects is too small,” says Molenkamp. “I think SMEs, mortgages and real estate are the most promising because they already exist or new investment vehicles are being established.”