PGGM applies alpha, beta to assets

ZEIST, Netherlands — Dutch pension giant PGGM has become one of the first European pension plans to manage assets according to alpha and beta.

The €77 billion ($96.5 billion) Stichting Pensioenfonds PGGM changed its internal investment process to focus on beta, enhanced beta and alpha strategies across multiple asset classes, said Leo Lueb, chief investment officer. By adopting an investment process based on alpha and beta, PGGM can now more effectively manage its risk budget and focus more resources on finding sustainable investment returns, Mr. Lueb said.

Until now, the plan would have had one manager trying to implement the three approaches in each asset category, he said. The new approach opens a whole universe of investment strategies that the plan could not embrace under the previous arrangement because investments were managed according to traditional asset class definitions, he added.

"Previously the universe was very much limited to the components of our policy portfolio. We have now very significantly broadened the scope of the universe of the strategies," Mr. Lueb said. "This enabled us to keep pace with developments in financial markets where new investment strategies are being created and risks packaged into investible form, very often crossing traditional asset class lines. Such strategies would include carbon trading, securitized reinsurance risks, securitized debt, infrastructure-related investments and innovative alpha strategies."

PGGM is following the 340 billion Danish kroner ($57.2 billion) ATP scheme, Hilleroed, Denmark, which last year restructured its investment process along alpha- and beta-generating strategies.

Henrik Jepsen, ATP's CIO for beta, said his plan's decision to restructure was primarily to manage risk more effectively, although diversification also was a concern. ATP now has a hedging portfolio and an investment portfolio, in which the underlying assets are managed as either alpha or beta assets, he said.

ATP's hedging portfolio is an overlay on the plan's liabilities and uses derivatives to manage interest rate risks. The bulk of the investment portfolio is in beta strategies, and a "couple of billion kroner" are invested in alpha-generating strategies such as long-short equities, global macro strategies and fixed income, Mr. Jepsen said.

At PGGM the lion's share of the assets, around €62 billion, is now managed through the beta and alpha processes and includes liquid assets such as equities, fixed income, government bonds and commodities. This is overseen by Piet Rolandt, director of portfolio management.

"On the beta side, we have been very successful in managing the risks in benchmark composition," said Mr. Lueb, commenting on results of the new approach. "In our beta process, there are a large number of clear solutions to replicate the risk that we are trying to achieve. Using these solutions has resulted in a more efficient and more effective approach to getting that market exposure on our books," he added.

For the alpha process, portable alpha strategies are transferred onto index positions in the beta portfolio. The strategies are measured according to their value at risk for the entire pension plan and represent about 5%, or €500 million, of the plan's total absolute risk of €10 billion.

"It's hard to say how much assets are invested in alpha because we look at it in terms of value at risk. That's one of the benefits of being able to decouple them (alpha and beta), as you don't necessarily need underlying assets to generate alpha," said Mr. Lueb.

Within the alpha portfolio, PGGM is seeking strategies sustainable over the long term. These strategies will typically be available in the "smaller pockets" of financial markets away from the most liquid financial indexes, he added.

But it is still in the early stage, and the plan is gradually expanding into new opportunities, said Mr. Lueb.

Enhanced beta accounts for €15 billion and is managed mainly with an absolute return focus, he said. The portfolio includes both public and private real estate and infrastructure assets and is managed by Johan van de Ende, director of real estate. The enhanced beta strategy also includes private equity, alternative beta and the €1.6 billion "portfolio of strategies" that is effectively an internally managed hedge fund of funds. The portfolio has a target return of 370 basis points above Euribor, the European interbank overnight lending rate.

"Enhanced beta is the center of the growth. It involves a mind shift to real investing to get an actual return," said Mr. Lueb.

So far this restructure has had limited impact for the plan's existing asset managers, he said. The manager lineup has not changed since the new structure was unveiled in February.

PGGM does not name its external money managers. But according to the 2006 edition of International Pension Funds & Their Advisers, the plan's external money managers include F&C Netherlands, AlpInvest Partners, Barclays Global Investors, Allianz and Goldman Sachs Asset Management International.

The mandates have changed little; only minor changes were made in some of the equity mandates. But Mr. Lueb does not rule out shaking things up in the future. The plan's decision to separate the management of alpha and beta portfolios now enables it to monitor more carefully how investment managers are able to generate outperformance.

In time, existing managers might find themselves having to work harder to keep PGGM mandates. "There will be more competition in terms of alpha-generating opportunities that we will be able to address and take advantage of. So in that sense, the competition will increase," said Mr. Lueb.

He said it was still too early to say what the impact of the new structure has been on investment performance.