NETHERLANDS – The €55bn PGGM pension fund has given Aegon The Netherlands a €1bn mandate for European government bonds, its largest-ever win and a sign of a change within the investment management style of large pension funds.
Previously this money was managed in-house by the Dutch health and welfare sector pension insurance company and is a core area for the fund. The allocation followed the notional €1bn tactical asset allocation mandate given to Goldman Sachs Asset Management earlier in the month. The allocated risk to this GSAM portfolio was the equivalent of €1bn notional with approximately 4% targeted tracking error.
PGGM now manages €12.64bn in-house, out of €17.05bn in its fixed income portfolio, and, after the 7.3% allocation to Aegon, has 27.3% with external managers. Until this deal, PGGM had a policy of not disclosing its external managers but admitted Aegon was its first Dutch asset manager for fixed income securities.
Piet Roelandt, director of fixed income at PGGM, said: “We chose Aegon because of its well-structured and transparent investment process. It has turned in an excellent historic performance. This mandate is consistent with our active investment policy and complements the strategies already implemented, with us searching for an optimum mix of internal and external management.”
PGGM’s spokeswoman declined to comment on whether this balance would change in the future and why such a core area was being outsourced but said there were no big mandates yet to be given over the summer. PGGM manages more than 90% of its equity portfolio, which makes up 48% of the fund, in-house. Alternative assets – hedge funds, private equity, property and commodities – make up the rest of the portfolio. AlpInvest handles private equity and the hedge fund managers are controlled by an in-house team, as are the property funds and commodity portfolios.
Aegon manages about €35bn in European sovereign fixed income, of which €3.5bn (including the PGGM deal) was from external parties. Frans van der Horst, head of institutional sales in the Netherlands at Aegon, said the PGGM mandate was its largest ever win, but it had won a number from third-parties in this area of about €250m in the past year.
Van der Horst said: “This success is related to our enhanced active investment style, which implies a very structured, risk-controlled investment process. Over the past few years we have developed a distinctive style and that is being recognised.”
Aegon manages its fixed income on a quadrant model – using macro, relative valuation, technical valuation and underlying trends and themes – to control risk. Its typical outperformance has been 0.4% to 0.5% above the Merrill Lynch European bond index he said. It has a team of five in sovereign debt with six credit managers and four in quants.
But it is relatively rare for such a large, core mandate to be granted in Europe, especially by a fund with a large in-house fund management operation. One consultant in the Netherlands, who was worried about the fund’s reaction said: “Most mandates have been in exotic areas, such as high yield not in core areas, such as government bonds. The trend had been for smaller funds than PGGM to outsource core areas to external funds managers.”
Van der Horst said whereas smaller pension funds often did not have the resources to manage all investment areas larger pension funds were approaching outsourcing through diversification of styles. “The larger pension funds with their own team have developed their own style but are now looking to blend it with others.” He added that the pension funds “a year ago were only asking about the performance on the mandate but now they are asking us to share our thoughts on diversification, as a second opinion to that they receive from their investment consultants. Almost a second line.”
As part of an insurance company he said Aegon was developing two key areas. One, is structured credit and asset-backed securities. It already has a joint venture with its US fund management arm for a high-yield bond fund and is developing another for emerging market debt. Two, is its Total Pensions Solution (TPS), to provide well-diversified asset portfolios with enhanced yield across, for example, sovereign, credit, high yield, hedge funds and properties over a long duration of 15 to 20 years.
The TPS has already launched earlier in June its first product, Aegon Strategic Allocation fund, which has 80% in fixed income and 20% in other well-diversified asset classes. Two more funds, with 75% and 65% respectively in fixed income and managed on a long duration are to be launched in September.