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Impact Investing

IPE special report May 2018

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'Progress' fund intends to live up to its name

The Unilever pension fund in the Netherlands has always played a part in the company's strategic thinking. Fennell Betson explains why

So strong is the branding ethos within Unilever that even the pension scheme has been branded. Ever since its formation over 75 years ago, the Dutch scheme has been called the 'Progress' fund, says its Rotterdam-based managing director Jos van Niekerk. This harks back to a time before the Anglo-Dutch merger that created Unilever, when employment conditions were uncertain in a Europe recovering from the devestation of the First World War. 'Progress' is a name signifying that you are going forward," he explains, adding: "The idea was that the fund was a progressive concept - that it is 'progressive' to think about the future."

Having a name also gave the pension fund a separate identity from the sponsoring employer, which he regards as an advantage. In the Unilever tradition, brand names un-derpin a product guaranteeing it always has the same quality - " 'Progress' stands for quality and good pension rights." says van Niekerk.

"The pensions schemes in the group have been developed over the years to ensure that employees feel well treated."

This was reinforced with the formation of Unilever in the 1930s, a business that relies on attracting high level personnel. "What all the different areas of Unilver have in common is the need for good personnel and that has been the basis for this pension scheme common to most of the group companies in the Netherlands." So the scheme has always been seen as playing a part in the mainstream corporate strategy.

This is even more so these days with Pro-gress' "efficient cost approach", which ac-cording to van Niekerk is making its pensions cheaper to provide than other groups'. Progress has been enjoying a contribution holiday for both employer and employees in recent years, due to the considerable surplus that has been amassed within the fund which had assets of DFl6.7bn($3.2bn) at end 1996.

"The fund size is increasing each year due to our returns. We are at or near the top of the 'hit list' as far as pension fund investment returns are concerned. In 1996, we had returns of 20.6%, which was well in excess of the Dutch universe of 15.2%." No flash in the pan either, as over the past five years, the fund produced returns averaging 13.6% pa, compared with a Dutch average of 11.4%.

He attributes this to having an asset allocation favouring equities, combined with good stock selection in the different areas. About 50% is in equities, where other local funds are closer to the 30% mark. "We have been investing in equities at a higher level than other funds for a considerable time. If you add in our property investment, which has been more important in the past, our exposure to real assets has been as high as two thirds."

Though the fund is long established with around 30,000 members, split roughly equally between retirees, actives and deferreds, van Niekerk des-cribes it as maturing rather than mature. But thanks to the size of the surplus, the strategic asset allocation can be relatively agressive.

Following asset liability modelling and discussions with the board of trustees, who are responsible for asset allocation, the equity content looks set to increase. "The upper limit for equities has now been put at 65%," says van Niekerk. "We have decided to decrease our property. We are satisfied with the good returns we have had, especially in the portfolio allocated to housing investment - around 50% of the portfolio directly invested in apartments, family homes and so on."

The Netherlands accounts for 45% of the equity assets, with the US proportion in the 10 to 15% range, the rest of Europe amounting to 25%, and Asia (excluding Japan) and the emerging markets take up another 10 to 15%.

"We have been underweight in Japan for a few years. The financial situation was not sound enough to expect an early improvement, but we do not know if the moment has yet come to invest there again."

With an internal team of managers handling 95% of the portfolio, van Niekerk is pleased with what they have achieved. "In quite a number of countries, we have exceeded the local index, for example, in the Netherlands, Belgium, US, Switzerland, Hong Kong and elsewhere in the Far East."

The emerging markets are partly handled internally, but a number of emerging market and small cap briefs are passed externally and more mandates are possible, as part of the increasing equity content. But the investment focus of the portfolio managers is not so much on markets or sectors, but on individual stockpicking.

"We are basically investing in companies that have a lot of value, which have outstanding long-term performance potential. These are companies that have invested in fundamental research, in market position, in branding products, or have invested in strong management. Usually they are companies that are very advanced in a technological sense."

The aim is to identify these companies and then stick with them long-term. "There is a broad sphere both economically and geographically where we are prepared to invest." At anyone time, the fund could be invested in 300 to 400 of such stocks. Much of the effort is directed to accessing information about these companies. "It is not the data that you are interested in - as this is available in huge amounts. It is a question of analysing this data and deciding what is useful to you."

The venture capital area is another area that attracts van Niekerk. "We are very interested in the opportunities presented by these smaller companies, particularly in Europe. There could be opportunities in the Netherlands, the UK, France and Germany - though the situation varies from country to country. We need to get to know the markets and the people who know the markets."

He sees this as a specialised area to use outside experts and venture funds, but adds: "The number of people who can show good returns and have management costs that are not excessive are scarce. It would be quite an investment to set up your own organisation and not be sure of the pay-off." One thing he feels would be helpful is the development of benchmark returns in other countries as have been developed recently for UK venture capital investments.He feels the accounting treatment of private equity needs to be improved.

The fund has found it difficult to outperform in fixed interest, which accounts for around 20% of the portfolio. "Last year we did well but if you look over a longer period, we are more or less level pegging with the universe of Dutch funds." Because Progress's liabilities are longer term, his belief is that its benchmark can be for longer durations, in the five to eight year range. Funds are often disinclined to take advantage of the longer terms their liabilities profiles allow.The approach to ethical, governance and environmental issues is direct: "These do not come into the picture as a special criterion. It is more a question of the quality of the company in which we invest." In such companies, he says the managers are responsible people and they are aware of the importance of ethical and environmental questions. "Normally, it is part of their strategy."

While the primary focus of Progress is on shareholder value, it is not the only consideration in van Niekerk's view. "We invest in quality and make sure the returns are optimal from and investment strategy point of view. Managements are very well aware that they can only deliver shareholder value, when they also comply with the quality expectations, on the employee and environmental side. There are more stakeholders than shareholders and it is the prime task of companies' managements to take all these factors into account when making their plans."

The advent of the Euro has been preoccupying van Niekerk, as he is very much involved with the approach of the pensions industry, where he is leading the national working party on preparing for the changeo ver. Within Progress, the responsibilities of the portfolio managers have been reorganised. "We have put the European area together, that is outside the Netherlands. So we are looking at Europe as a whole, which is important." That manager has the prime role of developing a strategy for the European portfolio. His advice to other funds is to act now and not wait until the Euro takes place. He is certain it will arrive, but warns that the "Euro may not happen in an easy manner, with many events occurring at the same time. The thing is to be organised on the basis of what you expect to happen, as it makes it easier to understand what is happening in the marketplace." IPE"

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