Costs drive ABP’s switch to passive in public markets

Managing costs is the central driver behind €470 Dutch civil service scheme ABP’s recent decision to switch much of its public market allocation to passive, index-led strategies, according to a spokesperson at the fund.

“Until now, ABP has been an active investor. Now we are looking more closely at costs, and we do not want to make the portfolio more complicated than necessary to achieve our goals,” said spokesperson Jos Van Dijk. ABP has been one of the few remaining Dutch funds to still pursue an active investment strategy and Van Dijk said the switch will begin this year, but won’t be completed by year-end.

ABP’s growing concerns around rising costs was visible in its (latest) annual report which flags that “asset management costs” had increased “significantly.”

The report states that total asset management costs were €5,596 million in 2021 compared to €3,548 million in 2020 writing that “despite the realised returns, costs are rising at an amount that is increasingly difficult to justify to our participants and stakeholders.”

Still, the report also notes that higher costs were mainly due to the higher returns (at the time) and notes that the alternative allocation accounts for around three quarters of asset management costs.

Van Dijk said that although passive investment will be the starting point for investment in both bonds and equities, ABP won’t rule out active investment.

“We can add forms of active investing if we have sufficient evidence in advance that, after deduction of costs, this structurally contributes more to achieving our ambition than index investing on the scale we have at ABP.”

The low-cost strategy at Europe’s largest pension fund is accompanied by sustainability and simplification priorities.

ABP stopped investing in fossil fuel producers in 2021 and its latest Sustainable and Responsible Investment Policy outlines key ambitions including carbon reduction in the equity portfolio and increased investments in the Sustainable Development Goals. In December 2022, ABP updated its Climate Policy for 2022-2030 targeting net zero greenhouse gas emissions by 2050 and 50 per cent less greenhouse gas emissions in 2030 than in 2019. Other targets include investing €30 billion in the climate transition by 2030, €10 billion of which in impact investments.

Quarterly returns

ABP has just posted its first positive returns in over a year, thanks in the main to equity. First quarter results revealed the pension fund’s assets had grown by €11 billion while the fund posted a 2.3 per cent return on investment.

Still, ABP flagged concerns about economic growth ahead, particularly inflation, warning of the possibility of disappointing returns because of weakness in the financial system.

ABP’s 40.1 per cent allocation to fixed income (government bonds, long-term government bonds, corporate bonds and emerging market bonds) returned 2.6 per cent. The 27.4 per cent allocation to equity (developed market equities and emerging market equities) returned 4.6 per cent and a 22.1 per cent allocation to alternatives (private equity, commodities, infrastructure and hedge funds) made a loss of -0.8 per cent. The hedge fund allocation is also being wound down.

ABP also has a portfolio overlay comprising interest and inflation hedge, currency hedge and cash allocation that also contributes to overall return.

“I am pleased that after a turbulent investment year in 2022, we made money again this quarter with our investments,” said Harmen van Wijnen, chair of the board of trustees in a statement.

The slight fall in interest rates means the value of the pensions that ABP must pay out increased by €6 billion. The current coverage ratio increased slightly in the first quarter from 110.9 per cent to 111.9 per cent due to the development in returns and liabilities.