NETHERLANDS - PGGM, the pension asset manager for healthcare and related industries, will suggest to clients including the PFZW health and welfare pension fund that they invest in fewer companies or adopt an exclusion policy.

The proposals were made by CIO Johan van der Ende yesterday at the presentation of PGGM's annual Responsible Investing report 2009 and have an implementation target of January 2011.

"We have reached a milestone," said Van der Ende during the meeting at PGGM's headquarters in Zeist: last year marked the first year that PGGM succeeded in exercising its voting rights at every company it invests in; three years earlier, this was only the case for just 20% of shareholder meetings.

Passive investing is hindering PGGM's ambitions to be a critical investor, said Van der Ende. "It's not a very comfortable feeling that we can't always know exactly what we're investing in," he said. "That is why we are now developing two alternatives to limit the number of stocks." Two thirds of investments are related to an index tailored by PGGM, investing in a total of over 4,000 benchmark companies.

One alternative drastically limits the number of companies to invest in. The other alternative is exclusion of the so-called ‘worst in class'. "Technically this is a rather challenging issue," conceded Marcel Jeuken, head of responsible investments. It means  further adjustments need to be made to PGGM's already tailor-made passive investment benchmark

PGGM is presently working out the details and will discuss the two alternatives with clients in June. The organisation first considered this change in July last year and now aims to implement the new investment structure by January 2011. (See earlier IPE story: PGGM mulls cull of individual equities)

"Our objective is to be conscious of how we invest across the entire portfolio," Van der Ende explained. PGGM aims to not just be a long term investor, but also an engaged investor. That's the reason why the CIO does not believe in things like a loyalty dividend. "That does not invite a critical look at a corporation's management. You can be critical only if you are not obliged to remain loyal in the long term. A loyalty dividend makes it too expensive to be critical."

PGGM want to have a better understanding of the portfolio to be able to implement an active engagement policy. The current portfolio is screened in its entirety based on exclusion criteria such as controversial weaponry and human rights. For 98% of the portfolio it has been determined that the companies involved observe the criteria. In 2009, a total of 33 companies were excluded, three more than the previous year.  These companies make up 1.2% of PGGM's ALM equity benchmark.

For 56% of assets under management, PGGM has defined decisive ESG criteria to screen for. That may not seem like much, but in reality things are not as simple as they seem, explains Jeucken. "We use futures to invest in commodities. It is questionable whether you can do much with that in terms of ESG." With some types of investments, implementing responsible investment principles can be very complicated.

Last year, for instance, PGGM came to the conclusion that the fund of hedge funds structure it had selected, was getting in the way of a critical investment policy. For this reason, the portfolio was transferred to an internally managed portfolio of hedge funds which was better suited for active engagement and an active dialogue with the manager.

Jeucken: "Now we can select hedge funds ourselves and make agreements with the hedge fund managers." A so-called ‘excuse provision' prevents returns from investments in excluded companies to be allocated to PGGM while other investors are not impacted by PGGM's exclusions.