APG, which manages €314 billion ($480 billion), has always been innovative.
Ronald Wuijster earned a reputation as somewhat of a pension rockstar when he introduced the idea of intellectual property rights as an asset class and bought the music rights to a number of high profile musicians from the contemporary to classical.
That investment, which amounts to about $917 million, is ticking along nicely. Now run out of the New York office, it earns income every time there is a CD sale, a song played on the radio or performed live, and increasingly in today’s music world, as songs are sampled by other artists.
In addition to out-of-the-box, opportunistic investments, APG takes seriously the evolution of its portfolio management and implementation, and has a close tie to academia.
Wuijster himself is studying a doctoral degree, crudely under the subject of decision making.
“Critics say people don’t understand finance. So, if we understand how people make decisions, we can know how to present financial products that they know what to expect and have a guide on how to improve regulation,” he says. In fact, many of the developments at APG have been driven by academic thinking.
Under the smart beta umbrella
About three years ago APG started implementing some of the strategies that broadly fit under the smart beta umbrella.
The practice started in commodities, where it excluded some of the commodity classes, such as natural gas, that have certain behaviours, in a bid to have a more optimal beta exposure. And in its equities exposure, the fund has more than 50 tilts along the “quant spectrum”.
Between 50 and 60 per cent of the developed markets equities exposure is managed using quant strategies and APG started using smart beta three years ago including value, momentum, quality, fundamental indexing, and risk tilts.
“We created a separate asset class for minimum volatility, and we are now researching to allocate to credit and emerging market equities in that. Clients can allocate to that building block,” he says.
APG also applies smart beta to real estate and in particular looks at the environmental spectrum in direct property, overweighting to environmentally friendly buildings.
“In real estate, environment tilts add value,” he says, adding APG was a partner on the 2013-GRESB-Survey.
Similarly, in the fund’s credit analysis, it will look at minimum volatility and quality strategies, and is increasing the focus on quality companies. Smart beta is pervasive at APG.
“Valuation is relatively basic but the majority of investors don’t pay attention to it; they favour glamorous stocks and that’s accepted because of the short-term pressures,” he says.
“Many investors are talking about smart beta, but there are not many doing it. The ideas are less than half the exercise; it is hard to execute and implement. We are well advanced but we could also do more; we are still trying to think of new ways.”
Sticking to the core
APG manages 80 per cent of assets in house and also implements its own passive strategies, which make up a minority of the whole. Instead, Wuijster describes APG as a moderate active investor.
“Our basic approach is we are in it for the long term and we stick to our core, so there are no rapid changes in asset allocation. Even since five years ago, it hasn’t changed that much,” he says. “We are a pension fund asset manager and manage relative to pension liabilities, which effects the overlay structures we apply. But we have always believed in diversification and still do.”
He describes the fund as well diversified and says in analysing asset allocation there is attention paid to the role an asset class plays in a portfolio, and what it adds to a certain characteristic such as return, hedging or diversification.
The analysis also includes decomposing assets into other risk factors such as liquidity.
APG is on a path to increase illiquid assets, and while it is by no means the endowment model, it will increase illiquids to between 20 and 30 per cent.
Wuijster says the biggest challenge for investors in 2013 is finding return.
“We have had a number of excellent returns, but in fixed income it is hard to see how you will get good returns. In traded equities there are still some opportunities but [these are] also already discounted in valuation.”
He believes emerging markets, both equities and debt, still present good opportunities, and within fixed income the fund is focusing on core treasuries, which it considers to be Germany, the Netherlands and France.
It also has a focus on “taking care of interest rate risk”, mainly because of the current regulatory framework, and inflation hedging.
APG, and Wuijster personally, get a lot of inspiration from academia.
“In January I spent time off looking at academic insights. We are looking at a cultural shift that may take years but we’re trying to have investment professionals focus less on alpha and more on organising asset class exposures as well. So, we will focus on a small number of alpha strategies where there’s a good chance of achieving alpha.”
The fund will be slick, managing liabilities through smart beta and focused alpha, reducing costs and good implementation.
An example of a more concentrated alpha approach is in equities, where it will look to find a small number of companies with an ESG approach.
“We have a lot of money managed internally, but some companies are better at a certain alpha strategy. We will look at what a team is good at doing and then decide.”
Within asset management, APG is looking at three areas:
1. Moving money in house
One example is the development of an internal private equity team, which will be a manager-of-managers structure and still use the expertise of Optinvest.
2. Negotiation on fees with managers
“Asset management is a high margin industry it is a bit over the top how you can make money. We are looking at using collective bargaining power and that is working. For example, in infrastructure the fees have developed and we’re not paying private equity-like fees anymore.”
3. Improving operational infrastructure