HEERLEN, Netherlands — In the ongoing search for uncorrelated sources of returns, officials at the world's third-largest pension fund recently found inspiration in a somewhat unlikely place — Madonna's “Ray of Light” and Beyonce's “Irreplaceable.”
Both songs are included in the music catalogs acquired by the €216 billion ($329 billion) Stichting Pensioenfonds ABP as part of an initiative to seek out esoteric investment ideas that have escaped the notice of other portfolio managers.
Nestled within the fund's asset management company, ABP Investments, the innovation committee is unique among pension funds. The committee explores ideas submitted by the firm's 450 employees for that flash of brilliance that might someday produce not so much a golden egg as sustainable income that gives ABP Investments an edge over its competitors.
The latest proposal to be implemented, which was announced Feb. 20, is an investment of €140 million to acquire the rights to 90,000 songs, including those by Madonna and Beyonce, from Universal Music Group, New York.
ABP expects a return of about 8% annually.
The total allocation to the innovation committee remains small — about 2% of the pension fund's assets. But beyond the raw numbers, ABP executives seek “to change the business culture in such a way that it will be a very usual thing to make a voyage of discovery outside your cubicle,” according to a staff brochure about the program.
Ideas that get accepted add competitive advantages, have a sustainable driver of returns, withstand potential reputation and headline risks, and are scalable given the fund's massive size.
“We wanted to make innovation sustainable,” said Stephan Lundbergh, secretary of the innovation committee and head of the innovation center. “We wanted to create a way of thinking within our organization to always look for new ideas, so that we will always produce better solutions as part of the day-to-day operation. We didn't want it to be something we only do at the beginning of the year ... and then forget about it the rest of the time.”
Any ABP employee can write a half-page pitch for an investment idea. If it passes muster with the six-member committee, the idea goes into extended research and a business plan is hatched. Most end up on the cutting room floor; only five of about 60 proposals submitted have been approved since the committee was launched in summer 2006.