HARROGATE, England - Introduction of the euro may lead Dutch pension funds to overhaul their investment strategies.
European Monetary Union could have sweeping effects on asset allocation and investment in European stocks, Jos van Niekerk, managing director of Unilever's "Progress" Pension Fund, told the National Association of Pension Funds annual conference in Harrogate.
If a single European currency leads to a higher degree of correlation between EMU countries, pension funds would consider new ways to diversify, perhaps by increasing investments in the Far East, North America, Japan or emerging markets, he explained.
In addition, equity investments in Europe could change dramatically. Euro-denominated stocks would form into a bigger market, offering greater diversification than the domestic market.
This broader market may also cause Dutch funds to focus more on economic sectors than on individual EU country strategies, Mr. van Niekerk said.
Dutch funds also would have to become more knowledgeable about a larger number of companies, possibly creating opportunities for money managers and brokers proffering advice, he added.
Heightened competition between stock exchanges in the euro bloc also could result in segmentation of the market and positioning by individual exchanges, he said. This could affect liquidity and levels of trading in certain types of securities.
A new European equity index to include about 250 stocks is being developed, which could become a benchmark for European equity investments, he added.
A single currency also may affect asset/liability planning, Mr. van Niekerk added.
For example, Dutch pension funds use a real interest rate of 4% in calculating the present value of their liabilities.
But real rates could rise under some scenarios. For example, demand for capital would rise if EMU brought stronger growth to Europe, requiring new investments while governments reduced their deficits, he said.
On the other hand, companies now "possess considerable liquidity at this moment," which could cause real interest rates to remain stable or decline slightly, Mr. van Niekerk said.
In a strong-growth EMU scenario, the equity risk premium could increase beyond historical levels, he observed. In the last five years, the equities (measured in guilders) returned five percentage points more than bond yields. Over longer periods, however, the premium has been closer to two percentage points, he noted.
Of course, EMU could fail. Risks must be managed with care, he said. "Careful analysis of individual stocks on a Europeanwide basis is crucial to success," Mr. van Niekerk said.
He also urged U.K. pension funds to appoint a "euro coordinator" to serve as contact point, collect information and recommend changes during the transition to the new currency.