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Dutch pension funds enjoyed 2004 as a second successive year of recovery. Total assets rose by e50bn to e539bn, according to the Central Bureau of Statistics.
By holding diversified portfolios in both bonds and equities, pension funds delivered strong performances in both major classes of securities: 7.3% for bonds and 9% for equities.
But the best performing asset class last year was property. It delivered 12%, with an astonishing 33% gain for the sub-class of listed property funds. Over one, three, five and 10 years, property has been the best performer among the three major asset classes for Dutch pension funds.
For PGGM and other aficionados of commodities, this was the leading ‘alternative’ asset: 13.3% in 2004, and 31% over three years. This would make little impact on overall returns because total allocation, as measured by The WM Company’s Universum, stands at just 1% to commodities as at the end of December 2004. More funds are considering an allocation this year, however. One in-house official said that the key determinant was the direction of the price of oil and he was undecided on this.
Before examining further the contributions made by investments last year, it is worth remembering the effect of higher payments made by employers and employees. This entirely reliable means of improving solvency ratios is responsible for over e2bn in extra contributions last year and approximately e1.6bn in 2005 to industry-wide funds alone. The Association for Industry-wide Funds in the Netherlands, the VB, notes that premiums have doubled since 2001 from e9bn to e18bn annually. This year average pension contributions will be e360 higher for each working member of an industry-wide fund, while at the other end beneficiaries are less likely to receive benefits in line with inflation. About one-third of pensioners from industry-wide funds received no such rise last year.
Looking from the top down, 2004 seemed an unremarkable year for asset allocation. In 2003 strong equity performance had seen this class grow from an average weighting of 36% of total assets at the start of the year to 40% by the end. This was in part aided by the weak performance of bonds (3.5% versus 12.8% for equities). Although equities again delivered last year, so too did fixed income, and pension funds seemed unwilling to make dramatic asset allocation switches on the back of that dual success. Over the year, total weightings to bonds rose one percentage point to 46%, while equities reduced one percentage point to 39%, according to Universum.
“We did not change our investment policy last year. We did not need to,” said Jan Huizinga, investment manager at the professional fund for dentists in Bilthoven.
This sentiment is reflected in the figures for other, larger funds. The e10bn fund for railway workers, based in Utrecht, saw its bond portfolio fall from 38% to 36% and equities rise correspondingly from 48% to 51%. The e7.2bn fund for the graphics industry experienced a 1% rise in fixed income holdings from 49% to 50%, while equities fell from 45% to 43%. PGGM, both large funds for the metal industry and the builders’ fund, reported similarly unspectacular alterations.
In fact only a handful of industrywide funds, which cover three-quarters of the workforce in the Netherlands, experienced allocation shifts greater than 5%. All bar the largest, ABP, upped their fixed income holdings at the expense of equities and property. The most significant change came from the fund for furniture industry employees: fixed income there rose 11% from 35% to 46% while equity reduced from 51% to 46%. The e2bn fund for architects’ practices also pushed up fixed income by 11%, to almost half of its entire allocation.
Elsewhere, the confectionery industry’s fund and the notaries’ practice fund each added 5% in bonds.
Roderick Munsters, the new chief investment officer at ABP, has already made clear that reducing fixed income is not a tactical consideration but a strategic aim. He told the UK’s National Association of Pension Funds in March that to achieve its long-term annualised return of 7%, ABP has to invest in real assets. This means equities, public and private; and real estate. But Munsters added to this group commodities and absolute return strategies such as hedge funds because of their growth potential. Fixed income, which still makes up 43% or almost e70bn of the fund, is there for diversification purposes. He was bearish on current yields and credit spreads from a long-term perspective.

From next year pension funds’ liabilities will have to be measured by market values. Coupled with the requirement to make up any fall below the funding ratio of 105% within 12 months, one might have expected greater changes in 2004 than those reported.
Instead, it seems that 2005 is the year of preparation for the new financial framework. To dampen volatility, funds are considering lengthening the duration of their fixed income portfolios. Most have liabilities more than double the duration of popular European bond indices. “We are looking at lengthening duration using interest rate swaps,” said Eric Martens, pension fund manager at the Agricultural Wholesalers’ Fund in ‘s-Gravenhage. “But there is a risk if you enter into a contract and interest rates
go up.”
He was happy that the solvency ratio of the fund had risen into safe territory – up from 99% in 2002 to 106% today. The fund has lowered its risk budget by adopting passive management for its core bond and equity holdings. While their ratio barely changed last year, the switch in style has been accompanied by more risk taking in other asset classes, principally some direct property. And employers have helped directly with higher contributions – up by more than two-thirds since 2002.
At the brewer Heineken there is occasion to celebrate with a beer for Frank de Waardt who has been consistently adding about 3% annualised to the e1.7bn fund in recent years by tactical asset allocation alone. “Tactical allocation is always in-house and we take a long-term view. But you need luck as well,”
he adds.
Possibly the wisest bet the fund took in 2004 was to acquire inflation-linked bonds worth about e200m, taking its exposure from 9% in January to 23% by December. “Everybody wants inflation-linked now. Perhaps I am going to sell it,” he says, only half in jest.
The Heineken fund’s duration is higher than the index averages of five to eight years but it is still relatively “quite short”, according to de Waardt, so he is acutely aware of what can be sold. Half of the finance for the purchases of inflation-linked bonds came from the sale of high yield bonds worth about e100m.
No one gets everything right all the time and de Waardt admits the Heineken fund does not have much real estate. But it has been rewarded for an accurate call on the euro’s appreciation against the dollar, choosing in 2001 to 100% hedge dollar investments (the benchmark is a 50% hedge).
Perhaps not every investor could see that 2001 would mark the lowest point of the euro’s value against the dollar. But by 2004 anyone not on the bus deserved some punishment, and duly received it. Unhedged US equities returned just 3.7%; a fully hedged position would have delivered 12.1%. That makes a considerable difference at total portfolio level as Dutch funds hold an average 11% in US equities.
Robert Rijlaarsdam, head of
WM Company’s Amsterdam office noted that asset managers have been busy creating active and passive currency management products.

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