ABP investment chief bucks long-dated trend

SCHIPHOL, Netherlands — Roderick Munsters is a natural contrarian.

"By nature, I don't like to simply copy things others are doing," said the chief investment officer of the €194 billion ($248.5 billion) Stichting Pensioenfonds ABP, the giant Dutch fund based in Heerlen.

Not only is he considering upping the plan's exposure to illiquid assets such as unlisted real estate, infrastructure and private equity, but also he's refusing to follow the current trend among Dutch pension plans to invest in long-dated fixed income. That trend is spurred by new Dutch legislation requiring pension plans to use mark-to-market accounting.

"How low can you go intellectually?" Mr. Munsters asked from his offices at one of the plan's investment operations in Schiphol. "If you have the ambition to offer your pension plan participants an attractive real return, it seems rather stupid in the long run to massively invest in long-dated fixed income at such low rates. The FTK (new pension funding rules to be introduced early next year) may require this, but maybe there is a design fault here," said Mr. Munsters, choosing his words carefully.

Some consultants and money managers close to the Dutch market see Mr. Munsters as the lone sane voice in the Dutch wilderness, while others view him as the naughty boy in the schoolyard.

But there's no doubt the size of ABP's €84 billion fixed-income portfolio, which is about 43% of the fund's total assets, makes it impossible for the fund to effectively immunize its portfolio without swamping the market.

One source who asked not to be identified speculated that Mr. Munsters' protests might be an attempt to create a virtue out of his plan's predicament.

Certainly, Mr. Munsters admits ABP, the state-sponsored pension fund for government employees, is in an easier position than many corporate pension plans to ignore pressure to match assets, thereby reducing short-term funding volatility, because it is funded by the Dutch government.

According to ABP's 2005 annual report, issued in April, the average duration of the plan's fixed-income investments is five years, compared with 16 years for its liabilities.

This "perceived mismatch" has been that way for the past 40 years and has been highlighted by recent changes to legislation and accounting rules, said Mr. Munsters. "We have chosen not to change the mismatch given our current investment plan, but we will look into it in the new plan" for 2007 to 2009, which will be unveiled late this year.

But don't hold your breath waiting for any major changes. Mr. Munsters dislikes the idea of following the herd and is far more interested in using what he calls "real assets" to hedge inflation.

"Attractive pensions are pensions that are indexed to inflation and competitively priced. The way we want to hedge inflation is by running a higher returning diversified portfolio geared to private, illiquid markets and real assets," he said.

As a result, Mr. Munsters is keen to increase the plan's exposure to real assets — unlisted real estate, infrastructure projects and private equity. Further details will be fleshed out in the upcoming new three-year investment strategy report, which will not differ much from the current program, he said.

"Currently we have 56% (of the total fund) in real assets so we are pretty well positioned," he said. The real assets include 20% of the total fund in real estate, commodities, infrastructure and private equity, with the remainder in equity investments.

ABP still has to reach its current strategic weighting of 4% of plan assets in private equity. "It's a lumpy investment class as far as asset allocation goes," he says. The plan has a 2.6% exposure to the asset class; expansion plans will be part of the strategy report coming late this year.

At the end of last year, ABP had €22 billion invested in real estate equity.

Mr. Munsters is very happy with the five-year performance of ABP's €5.1 billion commodity portfolio, but won't comment on whether he plans to increase exposure to this booming asset class. "Over the last few years the decision ABP took to invest in commodities has itself produced more return than the complete alpha portion of our investment strategy," he added.

ABP is also testing pure alpha strategies, and in April began volatility trading within its global tactical asset allocation portfolio using internal and external managers.

Gerlof de Vrij, head of the GTAA fund at ABP Investments, the investment management arm of the fund, said officials hope to expand ABP's volatility trading strategies, which are important sources of diversity and absolute return. The GTAA portfolio has a nominal value of 1% of plan assets.

Currently the plan trades volatility on equity, fixed income and currencies and its strategies were able to offset some of the losses experienced during the equity market volatility of May and June this year, Mr. de Vrij added.

More details on plans to focus on long-term investing will also be available in the upcoming new investment strategy. This may well involve revising both investment benchmarks for portfolios and incentive structures for external and internal money managers, said Mr. Munsters. The plan is looking into ways to change the incentive structure for both internal and external money managers to encourage long-term investing.

"With the current practice of looking at quarterly results of companies, investors have too much of a short-term orientation. Conceptually our business is not quarterly," said Mr. Munsters. "As a senior member of the investment committee said to me, ‘Your people need to look not just through the microscope but also out of the window.'"