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Powering ahead: a $125bn insti giant's lessons for AMs

Powering ahead: a $125bn insti giant's lessons for AMs

‘The pension world may not move fast, but we are big on innovation.’

So says Marc Siebel, senior fund manager with MN’s partnerships team, which oversees €45 billion in equity, private equity, real estate and non-listed real estate out of the Dutch pension giant’s total €125 billion pot.

The pace may be slower, but Siebel and his team do offer innovative ways in which to invest their sizeable funds and are part of a wave of forward-thinking institutional investors who could offer fresh perspectives for asset managers and private bankers.

‘We don’t claim to have an insight into everything that others are investing in, but I think we are at the forefront of most developments. We have been able to innovate in areas such as ESG and real estate and have created our own betas and strategic investment policy.’

Siebel works alongside Jeroen Bos and Jurgen Muijs van de Moer, who are also senior fund managers, to develop new ideas for the institutional giant.

This thinking feeds back to MN’s 10 clients, drawn from three full-service clients, metal industry pension funds PME and PMT, as well as merchant shipping group Koopvaardij. There are then several smaller clients, which have their assets pooled to create a better economy of scale for investing.

With such a wide array of tastes to cater for and such a huge pot of assets to invest, the trio has set about developing cutting-edge techniques to ensure liabilities are met in a timely fashion. So what lessons do this trio have for their peers in the asset management, private banking and asset allocation worlds?

Lesson 1: Get an edge on ESG

Siebel says ESG is one area where institutions are way ahead of their investment counterparts. Asset managers and private banks are waking up to the growing demand for a more considered approach to allocating capital, but their efforts pale against the strides institutions have made.

‘The Netherlands were among the first countries to actively embrace ESG criteria and we have seen more and more US companies follow this lead to become UN PRI signatories and integrate ESG into their investment processes and on a company level. It is really important for pension funds to have ESG embedded in their portfolios and they place a lot of emphasis on this,’ he says.

Siebel doesn’t foresee a ‘green-only’ environment but he urges investors not to underestimate its impact. ‘I wouldn’t say there will only be ESG-focused products going forward but they are likely to play a much bigger role than before and they are here to stay.’

With investment rivals catching on, Siebel says this is no time for institutions to sit back and bask in the glory of having done it first and there needs to be further evolution.

‘We are able to drill right down into funds and gather more and more information to challenge managers with. There is more emphasis on ESG in our meetings with managers now than five years ago.

‘When we see a manager is sub-par on ESG we want them to improve this side. It is not just about meeting demands, we want it to be really integrated, it should be in their DNA and not simply a marketing gimmick. We have spoken to several managers about the benefits of ESG who have subsequently gone on to instil the approach within their companies and processes and are now at the forefront of ESG developments.’

Siebel says the team monitors a ‘5P’ process to help ensure ESG is front and centre. This means assessing the fund’s parent company, people running the fund, performance, its process and how it impacts the planet as a whole.

Adding to Siebel’s comments, his colleague Jurgen Muijs van de Moer says the team has stepped up efforts to ensure ESG is being integrated in a measureable way.

‘We looked at the carbon footprint of our equity portfolios and compared this to their respective benchmarks. Sometimes you see that one or two stocks make a relatively large contribution to the carbon footprint of the portfolio. This information helps us talk to the manager about whether they take carbon footprints into account when looking at stocks.

‘ESG is generally seen as a risk factor when selecting stocks. Maybe there will be a premium or not but it is important for us to assess what type of portfolio risks we have.

‘Over the last couple of years we have customised the benchmarks for our clients. This tailoring helps them create more ESG-aware portfolios,’ Muijs van de Moer says.

Siebel says the process now has to go beyond a relatively crude exclusion in favour of a more nuanced approach. ‘All of our clients want to include ESG and with our current customisation we can screen out specific companies in specific sectors with a low ESG performance.

‘We also have a project called “conscious selection” which applies a rule-based screen on both ESG and financial characteristics which helps us to become more engaged with the way we select stocks for the long term.

‘For one of our clients we also have a third approach. The product chooses from the best-scoring companies on an ESG basis and has strong emphasis on trying to make the companies even better by having regular contact with management.

‘This is done in collaboratively and there can be a variety of ways to work towards improvement,’ says Siebel.

Lesson 2: build on solid foundations

It can take time to turn investors round to new ways of thinking but Siebel says this has not deterred MN from taking this path. ‘One of our biggest innovations is within real estate. Currently we have a matching portfolio and a return portfolio and each one serves a particular role.

‘Core real estate forms the lowest risk bucket within that part of clients’ portfolios. This new framework has been created in collaboration with our clients. We have set up a balanced scorecard for what we would define as “core real estate”.

‘In a nutshell we are trying to achieve stable and high cash flows. We have come up with several filters for the liquid and illiquid parts of our real estate exposure which aim to get high occupancy rates, low leverage, good rental income and a focus on developed countries and sectors, as we prefer not to have a lot of volatility in the returns for this bucket.’

Siebel says there is an element of domestic bias here, with a key focus on the local Dutch market but he says this meets client demand. ‘Our clients clearly have a strong preference for direct Dutch real estate but the size of our pension fund assets are so big it would not be prudent to allocate all of the money to this market.

‘We therefore diversify across direct and indirect real estate and across regions. The core real estate strategy was implemented in 2015. Initially there was a global exposure with international non-listed and listed real estate portfolios next to the Dutch direct real estate portfolio.

‘The focus now is shifting more to a European portfolio because, looking at the lowest return bucket within the return portfolio, our clients prefer to have mostly euro exposure as it lowers the return volatility as there is less currency risk.’

Lesson 3: smarten up on Smart Beta

A hot investment topic, particularly among asset managers, is how to best harness ‘smart beta’, or factor-based investing. For the MN team it boils down to some simple questions: how much beta are you allowing into your portfolios and how is that influencing your overall allocation mix?

Here Jeroen Bos once again raises the point about providing bespoke solutions. ‘At the moment, we do have alternative beta investments for a couple of our clients, especially in the context of equity products and we’re looking at what more we can do.

‘Some of our clients are interested in creating customised alternative beta products, based on integrating ESG and financial criteria, which we mentioned as strong long-term themes. The product will have a rules-based approach, which means the implementation is likely to take the form of a passive strategy.’

Siebel says this move to bring passive elements into the equity allocation always has to be done through a ‘standard portfolio perspective’, which considers how the overall beta is affected by adding passive elements to an active strategy.

‘The role of the alternative beta will be evaluated from our overall perspective and we have noticed some negative points here. That’s why we are looking at stepping away from the market-cap indices by constructing a benchmark in a different manner that gains better market exposure.

‘Employing this approach, or by creating certain biases in an equity portfolio, we should be able to achieve our overall targets more effectively. By creating our own rules we have less chance of being caught up with market crowds,’ he says.

Lesson 4: living with illiquidity

One advantage institutional investors have, Siebel says, is a captive investor base, which makes it easier to venture into illiquid areas of the market. By doing so, they can also alert asset managers and private banks to high-yielding new ideas.

‘We are able to have allocations to private equity, impact and infrastructure investments and mortgage investments, which are managed by other teams within MN.

‘We are not shying away from illiquid ideas, that is for sure, as long as we believe we can harvest the additional illiquidity premium’ he says.

‘There has always been an element of this in our asset allocation and this will increase as the pension funds grow in size.  One of the biggest innovations from a more illiquid standpoint for MN has been participating in setting up a Dutch mortgage lending firm and being one of the first investors in it.

‘This was developed in response to the low yields we were getting on government bonds, as mortgages give a nice spread above government bond yields.’

Siebel says asset managers and private bankers could move more towards illiquid assets but it takes a willingness to consider new ideas and risk tolerance. As an example, he says mortgage investments are becoming increasingly available, even to those without the financial muscle of MN.

Similarly, Siebel says education is helping to lift the clouds of complexity that may have put retail investors off in the past. ‘Most products can be understood pretty easily and are not so complex. There are also experts who can help explain things to the retail investor,’ he says.

One area the MN team currently aren’t involved in is the ‘emerging managers’ trend. This theme was previously championed by Tom Tull, CIO of the €22 billion Employees Retirement System of Texas, who established a dedicated programme to uncover managers either from smaller firms or from different ethnic backgrounds.

‘While we are not actively doing something there, it does sound like an interesting area of new ideas,’ says Muijs van de Moer.

‘However, we just try to find the best manager regardless of other factors. If you were led to select the second-best manager, due to guidelines such as this, or because of a quota-based system, for example, it might not be the best outcome for the pension investors.’

MiFID II matters

While the MN team may be blazing a different trail to asset managers and private bankers when it comes to asset allocation, they face a similar concern in the shape of MiFID II.

The Dutch firm has a task force assigned to help ensure its billions of assets are in compliant vehicles by January 2018 and the team is aware of the significant impact this new regulation will have.

Muijs van de Moer says: ‘New regulation is not always very clear and it can takes a lot of time to clarify things. This means the implementation of new regulation is also very costly. The Dutch financial supervisor for instance has not – as yet – communicated its point of view on the new research obligations.

‘We have selected many different asset managers and we get a lot of reporting and research from them, and we want managers to explain why they overweight or underweight certain countries, sectors or stocks. The information we receive – both research and reporting – is necessary to determine if the manager is doing a good job or not.

‘But do we need to pay for such research which we mostly use for our monitoring? I think we need more clarity about the different uses of this material. The main objective of the research provisions in MiFID II is to separate the costs for the purchase of research from the charges for execution services.

'Asset managers pay brokers but should we have to pay the asset managers for the research we require in order to determine whether they have done a proper job in selecting stocks?’

This article originally appeared in the October edition of Citywire Selector magazine.

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