The giant Dutch pension fund, ABP with €300 billion ($456 billion) in assets, is considering using smart beta benchmarks. While APG, which manages ABP’s assets has been using smart beta strategies for implementation for three years, the fund is taking it a step further and is now considering tilted benchmarks. Amanda White speaks to head of investments of the executive office at ABP, Jeroen Schreur.
The general pension fund for Dutch employees, ABP, is in good shape. It now has a funding ratio of 105.9 per cent and it can remove last year’s pension reduction (of 0.5 per cent).
With a long-term strategic asset allocation split broadly 60:40 the board, and executive committee, concentrates on diversifying that broad asset mix, reducing investment costs and finding better ways of implementing its policy.
For the past 10 years the long-term investment policy hasn’t changed much, with the asset allocation done within a risk framework based on the asset-liability study. (see asset allocation below).
Head of investments of the executive office at ABP, Jeroen Schreur, says there has been a slight shift in the asset allocation, and for the three-year period from 2013-2015 the fund has increased its strategic allocation to global equities and emerging markets by a collective 4 per cent; this offset by a collective 4 per cent lower allocation to real estate, GTAA and infrastructure.
“This change has partly to do with our size,” Schreur says. “From 2010-2012 our weight of equities has grown. In order for us not to sell – we’d be forced to sell to rebalance – we have made some smaller changes to asset allocation to bring in line the portfolio.
“The actual portfolio looks a bit different to the strategic asset allocation and we try to not be mechanical about rebalancing but look at the best way to rebalance, sometimes being forced to sell equities is not the best thing and it’s better to be overweight, versus the norm, for a little while.”
The investment executive office within ABP, which only has four employees, advises the board on policy, and works with and monitors APG on the investment implementation of the investment policy.
Schreur says that his office is always working on the details of the investment plan. In addition to the strategic investment plan every three years, a new plan is drafted every year looking at economic scenarios, contingency scenarios, constraints, bechmarks, hedging policies, ALM statistics ant implementation.
This annual review takes on different topics, including this year a discussion about the new regulatory framework within The Netherlands and the potential impact on discounting liabilities and inflation aspects of the contract.
Another topic under investigation this year is the idea of smart beta benchmarks.
ABP, via APG has been implementing the strategies that broadly fit under the smart beta umbrella for about three years.
In an interview in April last year, Ronald Wuijster chief client officer at APG Asset Management explained to conexust1f.flywheelstaging.com 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 has tilted for value, momentum, quality, fundamental indexing, and risk.
“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.
Similarly, in the fund’s credit analysis, it will look at minimum volatility and quality strategies, and is increasing the focus on quality companies.
“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.”
Now ABP, headed by Schreur in close consultation with APG, is undertaking a project about the appropriateness of using smart beta benchmarks.
“We are investigating it as part of the investment plan for next year,” Schreur says. “We are working with APG, providing more analysis and facilitating debate with the investment committee.”
The work is beginning with developed market equities, and examining the appropriateness for each asset class.
“For some asset classes, it may not add value or there are a number of definitions of smart beta benchmarks.”
ABP is also working closely with APG to monitor the costs of asset management.
“There is a trade-off between return, risk and cost and we are looking at cost-effective implementation of our investment policy.”
For example APG is currently looking at building its own private equity team, in a bid to reduce costs and move away from a fund-of-funds structure.
APG has managed ABP’s assets since it was created in 2008 when the board of trustees and management company split.
The investment part of the ABP executive office has four staff including Schreur and has specialist functions including risk management, policy development, and legal aspects to assist the board of trustees.
“We have a very long term relationship and contract with APG and we are not looking to change that. We do work with them intensely when they want to make important changes. For example at the moment private equity is managed externally and we are monitoring how closely APG is building expertise inhouse,” he says.
The ABP strategic asset allocation is:
Developed market equities 23%
Emerging market equities 8%
Real estate 9%
Private equity 5%
Hedge funds 5%
Government bonds 14%
Index-linked bonds 7%
Corporate bonds 16%
Alternative inflation 3%