THE NETHERLANDS - Dutch pension funds, with combined assets under management of €650bn, saw a year-end return of around 7.2%, according to investment performance firm WM Performance Services.

Due to strong growth in the second half, the 700 or so Dutch pension funds achieved combined positive returns for the fourth consecutive year, WM's Dutch Pension Fund Index study for 2006 showed.

The 7.2% return in 2006 includes "the effect from currency hedging, which were substantial and boosted the total return by 1.4%," the firm said in a release.

Equities and real estate were the main positive contributors in an environment of increasing interest rates, with most of the positive performance being obtained in the second half of 2006.

With negative returns of 1.7%, fixed income showed its first year of negative returns since 1999. According toWM, this was caused by the negative currency impact in international bonds, which account for around 20% of the total fixed income investments.

Also euro-denominated investments were negative and down 0.2% in 2006, despite improved performance during the second half of last year driven b y lower oil prices and a more neutral monetary policy by Central Banks.

Though positive, the overall year results of the funds are lagging behind the period 2003-2005. WM stated yields in 2005 were 14.2%, 9.9% in 2004, and 10.7% in 2003.

In the coming year, analysts expect more investments in the equity sector, as risks have become minimal while coverage ratios of the respective pension funds are showing impressive improvements. The only growing risk factor for investors at present are interest rates overall.

Philip Menco, chairman of pension insurer De Eendracht, told Dutch media that pension funds will increasingly have space for new investments, especially in equity. Today, analysts said they expected that pension funds such as ABP and PGGM, based on their expected higher coverage ratios, will also show an increased willingness to reinvest or increase overall equity investments (see our reports on the funds' Q4 results).

Since January 1 this year, pension funds and their supervisor DNB will have to base all strategy and investment decisions on a flexible interest rate situation. Previously, the 4% interest rate was used in valuations.

Possible other moves by  pension funds could be to put part of their investment portfolio in private equity, which should give higher yields. Reporting issues are different in private equity, as the companies invested in are not listed.