PGGM Investments, whose main client is the €75 billion ($107 billion) Pensioenfonds Zorg en Welzijn (PFZW) in the Netherlands, is well on its way to achieving its goal of becoming a commercial manager of pension fund assets, with more funds due to come on board soon. Else Bos, chief executive officer investments, spoke to Kristen Paech about PGGM’s commercial ambitions and the virtues of passive management.
PGGM Investments was established last year following a decision to split policy making from administration within the
Dutch pension fund for the healthcare and welfare sector.
The move saw the administrative and asset management company, PGGM Investments, transferred to a cooperative formed by the employer and employee organisations in the sector.
Since then, PGGM has taken on another smaller client, The Hague-based AENA Pension Fund, which marked its first
fiduciary management appointment since the company was spun off in January 2008.
According to Else Bos, chief executive officer investments at PGGM, more appointments are imminent and PGGM is in the “advanced stages” with the pension fund for Protestant church pastors, Pensioenfonds Predikanten.
“Three funds have signed contracts [memorandums of understanding] and we are in the RFP process with a few others,” he says.
“We aim to become a shared platform, to serve multiple schemes and pool their assets so we can provide economies of scale and better efficiency.”
Like most asset managers, Bos says market liquidity has been one of the biggest challenges for PGGM over the past 18 months, “particularly if you’re active in the derivative markets”
“A large portion of our portfolio is invested in illiquid markets and it has been a challenge to manage the portfolio and allocation targets within the portfolio,” she says.
Around 20 per cent of the portfolio is invested in illiquid assets split between private equity (7 per cent), private
real estate (7 per cent), infrastructure (1 per cent) and commodities (7 per cent).
“Obviously we’ve had to respond to the markets,” Bos says. “The pension plan lowered the allocation to commodities, temporarily increased the liability hedge, or interest rate hedge. Over time, in the past 10 years we have reduced our equities exposure from 60 per cent to 30 per cent. In taking down the pension plan’s exposure to listed equities, the allocation to alternatives was brought in.”
In line with this goal, PGGM recently invested €43 million ($61 million) in a microfinance private equity fund
managed by Grassroots Capital.
The fund invests in early-stage or start-up microfinance institutions, and is part of PGGM’s €200 million microfinance
program launched last year. Some €30 million of that has been invested in a credit strategy run by BlueOrchard Finance.
Bos says the decision to increase alternatives at the expense of equities is based on PGGM’s conviction that it is a better balance to have 30 per cent equities, 30 per cent bonds and 40 per cent alternatives.
“It provides a more stable long-term return and better risk-return profile,” she explains.
While minor changes were made to the portfolio during the market turmoil, such as the reduction in commodities from 7 per cent to 5 per cent, Bos says PGGM believed it could reasonably manage the volatility within the borders of its asset allocation strategy.
It is this confidence in its investment philosophy which saw PGGM take the radical step early last year of abandoning
active management altogether.
“We did a thorough analysis of our active managers and concluded that over time, we could prove that they did not add sustainable value after costs, especially in combination with the collateral management for derivatives exposure,” Bos says.
“We decided to eliminate all of our traditional long-only active managers out of the portfolio and changed to a
more low-active risk.”
This is made up of index management, mean variance, “quality” or alternative beta and value and Bos says not only is it less expensive, it provides PGGM with more clarity within the portfolio.
The quality allocation, which is framed in absolute risk not relative risk terms, next year will form 16 per cent of the
total equity portfolio.
Other changes include a gradual increase of its allocation to infrastructure, and an increased weighting to structured
credit, which Bos says is largely compiled of “very specific, private one-on-one deals with banks”.