market-insight-netherlands-2012-q3

Dutch fund selectors are living up to expectations. More than half of delegates surveyed at the Expert Investor Netherlands conference in September 2011, planned to increase their investment grade corporate bond allocations during the following 12 months – the strongest positive response on any mainstream asset class (see graph 1). In July, our researchers found that many Amsterdam-based investors have made good on their plans, and are running overweight positions in corporate debt.

Corporate bonds

Short-dated securities are preferred
Fund selectors in the Netherlands are not alone in their appetite for corporate bonds – low yields on developed world government debt securities have encouraged many income-hungry investors to seek returns elsewhere, leading growing numbers into credit strategies. Indeed, demand has been so great that the average yield on global corporate debt was less than 4% in July – an all-time low, according to a Bank of America Merrill Lynch global broad market corporate and high yield index.
Dutch interviewees – the majority of whom are wealth managers at private and retail banks – say yields of 3% to 3.5% are appealing, but they are also willing to pay a premium for short-dated, lower-risk securities. One investor we spoke to has built an exposure to corporate bonds issued in the Nordic region and Australia – markets in which he previously held government debt securities. Other interviewees have similarly reduced their exposure to US treasuries and German bunds.

High yield

Investors are unenthused by non-investment grade corporate debt
Views on high yield corporate securities are mixed, meanwhile, with many fund selectors focusing only on investment grade bonds. This lack of appetite could be seen as surprising in a European context, given the sustained demand for high yield seen in other countries. Yet it is the continuation of a trend among Dutch investors. Just 5% of Expert Investor Netherlands delegates planned to boost their high yield exposure, while more than half expected to reduce their weightings (see graph 2).

Equities

Interviewees are upbeat on multinationals with emerging market exposure
Investment grade debt is not the only beneficiary of shrinking government bond yields – fund selectors also plan to up their equity exposure. Although Dutch investors tend to favour cross-border vehicles, European Fund and Asset Management Association data for domestic funds indicates that they were heavy sellers of equities around the turn of the year. Netherlands-domiciled equity funds saw outflows of more than €700m and €500m in Q4 2011 and Q1 2012 respectively (see graph 3).

Nevertheless, many interviewees are currently upbeat on equities. While they are not generally focusing on particular stock markets or regions, they favour exposure to European and US multi-national companies – as an indirect way of tapping into economic growth in the emerging markets, rather than a play on the recovery of western economies. This tallies with data collected last September, when conference attendees displayed a strong appetite for developing world assets.
Delegates at the EIE event, held in Amsterdam, expressed a preference both for emerging market equities over EU and US stocks (see graphs 4, 5 and 6), and for government bonds issued by developing nations (see graph 7).

As might be expected, wealth managers, whose key aim is wealth preservation, are less enthusiastic on riskier mid-cap and small-cap equities. But, perhaps surprisingly given their desire for yield and large, defensive stocks, interviewees also display little appetite for equity income products, despite concerted marketing by fund groups who run such strategies. In terms of management style, Dutch fund selectors favour equity portfolios with long-term investment horizons and low turnover.

Alternatives

Real estate no longer core but absolute return is popular
Away from bonds and stocks, Dutch investors have long used property as a portfolio diversifier. However, fund selectors are downbeat on bricks-and-mortar investments, and now consider real estate as an ‘alternative’ asset class rather than a core allocation.
Elsewhere in the alternatives arena, the desire among interviewees for low-volatility investments is apparent in their rising appetite for absolute return vehicles. Those with retail clients express a particular wish to see more hedge fund strategies repackaged in regulated Ucits structures.

Key concerns

Fund selectors worry about ETF counterparty risk and currency fluctuations
Other topics vexing interviewees include currency exposure and securities lending by the exchange traded fund (ETF) industry. In common with investors in other countries, Dutch fund selectors are increasingly incorporating passive vehicles such as ETFs into their portfolios, owing to concerns over the ability of active managers to outperform their benchmarks on a consistent basis. However, some are worried about counterparty risk, in relation to ETFs which lend out their underlying holdings.
Interviewees also express concerns over currency fluctuations. Dutch investors are allocating ever-larger proportions of their portfolios to non-euro denominated investments, so volatility in foreign exchange markets has a growing impact on overall returns. As a result, many fund selectors are currently seeking ways to hedge their overseas currency exposure, to reduce downside risk.