GRONINGEN, The Netherlands - The 6.3 billion guilder ($3.57 billion) PTT Nederland Pension Fund has just adopted a new target asset mix that will boost equities to 42% from 36%.
While 42% might not seem that aggressive to U.S. or U.K. investors, it is twice the average for Dutch pension funds.
The move reinforces PTT's philosophy - think globally. From this isolated town three hours from Amsterdam, executives of the pension fund for postal and telecommunications workers have invested 85% of its equity portfolio outside of its home market.
Since the fund was spun off from the giant Algemeen Burgerlijk Pensioenfonds in January 1989, PTT pension executives have developed a sophisticated and innovative strategy that stands out, particularly for a fund of its size.
"The challenge is that it is a small and flexible fund," said Jan Willem Baan, head of investments. "We have a flexible decision-making structure. So when we (reach) a critical (point), it doesn't take too much time to do something."
Among the highlights at the fund:
PTT pension executives make the key decisions on setting the fund's geographic allocation in equities. That is especially critical because of the high proportion of equities invested outside of Holland's tiny stock market - including a double-weight position in emerging markets stocks.
Fund executives also determine the fund's country allocations for real estate. The fund invests through pooled vehicles and real estate securities in Holland, Western Europe, the United States and the Pacific Basin.
Bond management for Dutch and German bonds is done internally. PTT officials will decide whether to increase the fund's global bond portfolio next year or to hire additional managers.
Fund officials are studying whether to invest in commodities and to what extent to hedge their currency exposure.
100% in goverment debt
The fund was spun off from ABP six years ago, after the Dutch government decided to privatize its postal and telecommunications operations - although shares were not sold publicly until last June.
The new fund inherited 80,000 active workers, and was given 3 billion guilders to fully cover their accrued liabilities. Retirees remained within the ABP fund.
But there was a catch: 100% of the assets were invested in government debt securities issued by the Dutch and municipal governments and utilities.
Investment staff wasn't hired until the summer of 1989. Bernard Boertien, managing director, moved over from Pensioenfonds PGGM in Zeist, as did Mr. Baan. Former Shell Pension Fund and Pierson Heldring & Pierson executive Lou ten Cate joined as chief investment officer, although he left in 1993 to start an asset consulting firm in Amsterdam. Mr. Baan has absorbed Mr. ten Cate's responsibilities. Pierre Voncken heads the fund's research area.
A move into equities started quickly, undeterred by Mr. Boertien's sudden death in 1990. By the end of 1990, 14% of assets were invested in equities. By the end of 1991, it was up to 27% and has crept up gradually to 36%.
With advice from Amro Bank (now ABN Amro Bank), fund officials decided to keep a very conservative bond portfolio, while taking greater risks with the equity portfolio.
85% in overseas stocks
As a result, PTT officials have invested 85% of their stock portfolio outside of Holland's stock market. Guidelines permit them to keep Dutch stocks between 10% and 30% of total equities.
Fund officials have split assets evenly between passive and active managers. Weighing the arguments between the two, PTT pension executives decided they were "agnostic," Mr. Baan explained.
Last year, the executives followed up on a 1989 asset allocation study. As a result, they expect to increase active management to between 60% and 70% of their equity allocation, which may mean some shrinkage for the passive portfolios run by Wells Fargo Nikko Investment Advisors, London, and State Street Global Advisors, Boston.
What's more, pension executives decided to keep a very hands-on approach to equity management. While they decided to hire external managers to run individual portfolios, they retained control of the geographic asset allocation - like the much larger PGGM fund.
"It's difficult enough to make the right decision on the countries and the timing. We don't want the micro-decisions of which stocks (to buy)," Mr. Baan said.
The fund has 12 active managers: three for the United States, two for Latin America, and one each for Canada, the United Kingdom, Germany, France, Holland, Pacific Basin ex-Japan, and Japan. Mr. Baan declined to disclose the managers' names, but he did say Citibank is the fund's global custodian.
Fund officials examine the equity allocation every quarter. "We look at historical correlations between markets, and expected returns for all markets," Mr. Baan said. Strategic shifts also are taken every month.
In 1994, pension executives decided to examine their asset mix in light of the fund's liability structure. They enlisted the help of officials at ABN Amro and Paul van Aalst, a professor at the University of Rotterdam.
In December, the PTT board adopted a new asset mix that will boost equities to 42%, while shrinking bonds to 50% from 53% and lowering real estate to 8% from 9%.
For a fund with virtually no retirees, a higher equity exposure might have been viable. "That's certainly an argument that we could pick up more equities than we do. But we also have to deal with the Dutch culture. Pension funds in the Netherlands do not have 80% to 90% invested in equities," Mr. Baan said. "Only in the last couple of years" have equity allocations risen, he added.
Meanwhile, PTT officials will examine whether they will further internationalize its bond portfolio. Dutch and German bonds are managed internally, while a 200 million guilder global bond portfolio is managed externally.
A role for real estate
The only surprising element of the asset/liability study, Mr. Baan said, is that it found a role for real estate. Asset allocation studies usually fail to adequately consider volatility in the asset class because it only happens when investors are ready to sell, he said.
While some big Dutch pension funds allocate 20% to real estate, usually heavily weighted in housing, the PTT fund has struggled to reach its earlier target of 17%.
By the end of 1994, the fund had reached 9% of total assets in property. Fund officials invested through a variety of pooled vehicles and publicly traded securities in different markets.
Using a similar country allocation process that they use for stocks, PTT officials invested through private and public real estate investment trusts in the United States, while using pooled vehicles in Germany, Holland and Southern Europe. In Britain and the Pacific Basin, they invest through real estate securities.
For the future, fund officials are exploring a number of areas. While the fund previously had a currency overlay program, it was dropped in 1993 because it failed to work properly when markets made minor moves up and down.
Officials now are studying what type of hedging exposure they want, and may eventually seek outside managers. The study is due in late spring.
In addition, they are reviewing whether to make an investment in commodities because of their high correlation with inflation. But Mr. Baan said investments in a new asset class, such as commodities or venture capital, would not help the fund's total return unless the commitment is at least 5%.
Mr. Baan said other pension funds can do the same. "It would depend on the people. You do need an entrepreneurial board of trustees. We don't have any complaints about that."