APG opts for status quo in allocations

Conservatism will reign in the Netherlands in 2011, as a well-diversified, relatively liquid portfolio drives the asset allocation of APG Asset Management. But while caution rules, head of strategy, Ronald Wuijster is also well-aware of the need for an open mind around the measurement of risk.

Sticking with the status quo, at least in the medium term, is the mantra for APG as it heads into 2011.

There have not been many changes to the strategic asset allocation in its newly set, but yet unapproved, investment plan for the coming year. It set its strategic asset allocation plan for 2011-2012 as recently as May this year, so it was unlikely to make any radical departures [see asset allocation below].

“We have a very balanced portfolio with a lot of diversification, and our illiquid assets are below 30 per cent,” head of strategy, Ronald Wuijster, says. “We think it is wise to have some risk, but in equities we seek that in emerging markets more so. We also look at both sides of the inflation/deflation discussion.”

This is being played out in the form of discussion around inflation swaps and “looking at project finance in inflation”, with the outcome, perhaps the construction of index-linked corporate bonds in-house.

About 70 per cent of APG’s $345 billion assets are managed in-house, with typically illiquid and emerging market mandates outsourced.

Wuijster’s strategy team is a made up of a myriad of skilled professionals including a separate asset liability matching team of about 10 people, a portfolio optimisation team of three, economics and finance team of eight, and allocation and overlay team of five. And the resulting asset allocation is a result of much team work.

This year in addition to relatively conservative asset allocation, APG is conscious of reducing complexity in its portfolio construction.

“In 2008-09 we were looking at separating the portfolio into growth and income and in the process decided not to go the full way. A bundle of assets that do matching and return but have strict separation creates a lot of complexity. For example we would have three overlays in total – one for each portfolio and one overall overlay.”

But the philosophy of that separation has been retained and APG still looks at each asset for its underlying role – is it for liability-matching or return elements – but it has one overlay only.

For APG, overlay management includes duration lengthening, currency, inflation, equity risk hedging, and tactical or dynamic asset allocations, although most of its clients do not engage in dynamic asset allocation choosing instead to rely on methodological rebalancing.

“Some good things have come out of the process, our portfolio construction method and looking at the way assets play a role, but management considerations stopped it. Would two portfolios still be optimal? It is difficult to understand why two separate portfolios – and the sum of which would be better than one,” he says.

The topic of complexity is one that many Dutch funds are pondering (see also PGGM profile), and specifically whether adding more complexity gets a better result.

“We don’t think you can be too simple, you need some overlays, but three overlays? You need some balance. Derivatives themselves are ok but you can’t have too much. You have to manage real life funds management problems such as credit, liquidity risks.”

Wuijster says APG is paying more attention to portfolio liquidity management, and the next step working with risk will be more factor analysis.

“Risk is the probability that your expectations are not met, not just about return,” he says.

APG has more than 600 investment staff, with the process organised around 14 building blocks, the asset classes, as well as a team in strategic asset allocation and overlays.

The investment management process has recently been made “a bit stricter, more formal, and more process orientated”.

“We have paid more attention to risk management and there is more focus on the pureness of our exposure and understanding of risk in a broad sense,” he says.

Risk management has been heightened and in particular a focus on improving the links between ways to manage risks.

“Risk is more than just a statistical analysis. We’ve been looking at the overall risk management and individual risks in individual asset classes and how we are bringing it all together.”

ABP strategic investment portfolio

Investment mix 2009 2010-2012
Government bonds 10% 10%
Price indexed bonds 9% 12%
Corporate bonds 21% 16%
Alternative inflation 7% 7%
Global TAA 2% 3%
Equities, developed markets 24% 20%
Equities, emerging markets 5% 7%
Private equity 5% 5%
Real estate 8% 9%
Infrastructure 1% 2%
Commodities 0% 1%
Opportunity fund 4% 4%
Hedge funds 4% 4%