Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
January 22, 2018 12:00 AM

Institutions close European mortgage gap

Investors move into market in pursuit of better yields

Paulina Pielichata
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Mark Willems sees PGGM looking at the mortgage market as a way to get a better return than from lower-yielding fixed income.

    Opportunities in European mortgages are emerging, with pension funds beginning to fill the funding gap left by European banks in the aftermath of the global financial crisis, estimated by McKinsey & Co. to reach €3.4 trillion ($4 trillion) by 2019.

    Now that banks have tightened up on issuing residential mortgages as a result of capital requirements imposed by Basel III regulation, the market has opened to new players, including money managers.

    And investors are finding a variety of ways to access this market, largely through direct funding of non-bank mortgage companies and investing in covered bonds. Some new vehicles are arriving on the radar of institutional investors, who have been eager to find new fixed-income investments after quantitative easing pinched bond yields.

    Such strategies have allowed asset owners in the Netherlands, in particular, to invest directly in residential mortgages in the past few years through pooled funds provided by investment management companies such as Dutch Mortgage Funding Co. More recently, in November, Stabelo AB, Stockholm launched a similar vehicle to lure Swedish institutional investors.

    Taking note of booming residential markets in Europe as well as these new ​ players, asset owners are taking mortgage-type strategies more seriously, sources said. In addition, money managers report increased investor appetite for mortgage-backed derivative investments, such as the covered bonds that banks use to fund their mortgage programs.

    Asset owners could realize an annualized return of around 2.7% investing in mortgage loans pooled by companies such as Dutch Mortgage, according to Marieke Hut, director at Dutch Mortgage Funding in Amsterdam. That compares with the annualized 1.02% return on covered bonds that investors could earn in the past three years, according to the Markit Iboxx covered bond benchmark. Yield offered by these covered bonds stood at 0.47%, while similarly rated 5-year Dutch government bonds had negative yield of 0.14%.

    Attractive qualities

    One institution that finds mortgages attractive is PGGM, manager of the €188.5 billion ($226 billion) Pensioenfonds Zorg en Welzijn, Zeist, Netherlands. "Investing in Dutch mortgages offer (an) attractive illiquidity premium combined with low risk and diversification benefits," said Mark Willems, PGGM's senior strategist within institutional business. "For us, mortgages are an alternative to low-yielding fixed-income assets, mainly investment-grade credits."

    PGGM allocated €2 billion into these strategies in the past two years with Dutch Mortgage Funding. The mortgages PGGM invests in are provided to employees in the health-care sector only, Mr. Willems said. PFZW's 2.6 million participants work in health care.

    Asset owners also found that by investing directly in residential mortgage lending they could earn more than through other kinds of residential mortgage investments.

    Hampus Broden, founding partner of Stabelo in Stockholm, said the main benefit of direct mortgage investments is the very significant yield pickup relative to, for example, covered bonds. Ms.Hut added that investors can earn 170 basis points over the coupon of Dutch government bonds.

    In the Netherlands, Dutch Mortgage Lending has secured about €12 billion in commitments from 15 domestic pension funds since the firm launched in 2014. Ms. Hut said that since inception, the company has deployed €10 billion of that into Dutch mortgages.

    Gearing up in Sweden

    In Sweden, Stabelo is gearing up to cater to domestic institutional demand in a similar way. Investors will commit to a pooled investment vehicle that distributes mortgage loans to consumers through online lender Avanza.

    Stabelo's pooled vehicle is not limited to a specific investor. "We have secured commitments from insurance companies, occupational pension plans and public Swedish pension funds," Mr. Broden said. He declined to name the investors.

    Stabelo's business, like Dutch Mortgage Funding, is aimed at defined benefit funds, which may want to use investments in mortgage strategies for asset-liability matching in their portfolios.

    European regulators have recognized both Dutch Mortgage Funding and Stabelo as alternative money managers under the Alternative Investment Fund Managers Directive.

    Mortgage-driven strategies succeeded in some European countries even before the global financial crisis in the form of covered bonds. Sources said interest for them in Europe has been rising in the past three years as this $2 trillion market did not develop in other parts of the world to the same extent.

    Dag Messelt, head of Nordic investment specialists and international business development at Alfred Berg, a subsidiary of BNP Paribas Asset Management, in Oslo, said a big advantage of the Nordic covered bonds market is that it's not being distorted by the European Central Bank's QE program, which only takes in euro-denominated bonds.

    The low default level and the AAA rating adds to the attractiveness of covered bonds for both domestic and global investors.

    Japan investors interested

    The Danish mortgage market, in particular, attracts institutional investors from Japan, who also want to diversify from domestic Japanese fixed-income with returns influenced by Bank of Japan's monetary policy.

    Steve Williams, senior portfolio manager at Nikko Asset Management in London, said: "(Our) Japanese investors get a relative yield pickup by diversifying away from domestic assets, where (Japanese government bonds) currently yield some 0.08%. By comparison Danish mortgages can offer yield in (yen) terms close to 2%." Nikko's Danish covered bond strategy grew to $2.3 billion since inception in 2016, Mr. Williams said.

    Local asset owner, ATP, Hilleroed, Denmark, also utilized mortgage bonds for low risk exposure in its diversified portfolio, a spokeswoman at the 758.1 billion Danish kroner ($122 billion) pension fund said. However, she declined to provide additional details of ATP's strategy.

    In the U.K., mortgage strategies also have seen demand from investors. Insight Investment Management runs a £1.5 billion ($2 billion) pooled secured finance fund that's becoming popular with U.K. pension funds.

    "Our clients in the pooled fund invest various amounts, from tens to hundreds of millions but we also have some segregated mandates from larger clients, which generally start at 150 million" said Jeremy Deacon, senior portfolio manager at the firm in London. Mr. Deacon would not name any clients that have committed to Insight's strategy.

    Related Articles
    European pension funds could exacerbate systemic shock — conference speakers
    Another MiFID II impact: Best execution of derivatives
    MiFID II research rules concern bond managers
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Emerging Markets: A Selective Approach
    Sponsored Content: Emerging Markets: A Selective Approach

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    July 4, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit