retiring types

Dylan Emery: Which asset classes are you interested in?

Cor Zeeman: Corporate bonds, high yield, emerging market debt and, to a lesser extent, hedge funds and private equity. These are shifts right now in the portfolios.

DE: Has anyone moved towards commodities?

Anton van Nunen: Several clients of mine have the idea of [using commodities as] an inflation hedge. In general, it works. But it’s not an asset class that I would favour. I would rather have inflation-linked bonds when you want to hedge against inflation. Commodities are too [volatile] – especially equities in commodities.

DE: Commodities presumably provide you with diversification and new asset classes. Are they useful tools in this sense?

Ger Goris: Immediately you have to separate perishable from non-perish- able commodities. Perishable commodities are completely out, as far as I can see – because it’s very short- term, how far forward you can [forecast prices]. That is not really what a pension fund should be looking at.

AvN: You don’t want to be a pension fund with pork bellies in your cellar.

Mathijs van Gool: By education, I am a geologist. The prices of commodities go up and down. So where do you get the expertise and fundamentally be on the right side, on taking the risk on commodities developments? It’s very difficult to do. And you can never really explain to the public that you have the expertise on getting these risks right.

GG: I tend to say that currencies are a separate asset class because, long- term, if you always hedge your currencies, you don’t get rewarded for it.

DE: There is currency trading and currency management. Which are we talking about?

MvG: We believe that we cannot be an expert, or hire the expertise, for currency risk. So we hedge it all away.

CZ: We only hedge dollars to euros. That means, on our equity, about 25% is in all kinds of other currencies which will move up and down, but together will be stable against the euro. That was our view, let’s say, until January this year. But maybe we should change that view, because now the euro is not so stable. All these [currencies] are still moving against each other, let’s say randomly. But against the euro, they are all moving together, against it. So that could be a small problem in the future.

AvN: I would not like to hedge my emerging market currencies, be- cause in the long-run I think they will appreciate. And it costs too much.

DE: If you could start from scratch, would you create a portfolio without home market bias?

CZ: In the Netherlands, a lot of pension funds do not have a home bias in equities, for instance. Nor for bonds. So I don’t see a big problem because – and it’s different to the Nordics and the UK – Dutch pension funds are in- vested worldwide. But we all look at the euro as our main currency. That’s because our pensioners are not interested in being paid in Taiwan dollars, or whatever, because they can- not buy anything in that currency. So we still have to hedge things against the euro, because that’s the currency we pay out. You can buy anything as long as you hedge the currency. If you do it for the three main currencies – the yen, pound and dollar – the cost is almost zero.

DE: Generally speaking, you want to have as much in euros as possible, because that’s where the eventual liabilities are. Would that push against a full investment in emerging market equities?

CZ: Fully-invested? That would be a large risk. But I would say the main part of your portfolio would be in euros, or hedged against euros. Then you could use some risk to go into emerging markets without hedging the currencies. But you’re not going to do that for 100% [of the portfolio].

AvN: Emerging markets have better prospects now than they ever had. People used to avoid these markets because of the high volatility. We know now what volatility is, in the eurozone. So that’s not a discriminator anymore. It really is a positive for emerging market equity.

DE: Then your currency problem will remain, because you’re always going to be under pressure to increase your weighting towards bonds in those countries?

AvN: Yes, you should take that into your risk consideration, but you should not hedge that risk. Because if you do, [it is inconsistent with] taking this stake in equity.

DE: In equities it’s true. But in bonds it’s the other way round – if you expect a weaker currency then you expect lower interest rates. So do you hedge your currency in bond exposure?

AvN: You shouldn’t do that, because that’s far too large a part of your return in bonds.

CZ: If you have dollars, that’s a huge amount of dollars. But if you’re doing emerging markets, it is 50 currencies, so they cannot all move one way. They will randomly move up and down. Those are neighbour countries, they have revaluations be- tween themselves, and they cannot all go down, because then the whole emerging markets will go down. Asia, Eastern Europe – all those regions have different currencies.

MvG: In the Netherlands, we have a very open economy. So pension funds in the late ’70s and ’80s already start- ed diversifying their investments all over the world. And indeed liabilities have to be paid in euros, so there is a natural trend to stick more or less to this currency. But the point I want to make is that the suggestion that you should go out of Europe with your in- vestments, I think is the wrong one. Because we should not forget that – maybe because of the weak euro and the industrial strength, especially in Germany and the Netherlands – exports are flourishing. A lower euro will help this industry development perform even better. So there are a lot of good investment opportunities, even in Europe.

DE: The crisis has pushed countries towards more right-wing governments or isolationism. What has happened here, in this famously cosmopolitan country

AvN: Politicians are stressing the aspect that, if banks withdraw from credit and if the mortgage market is in trouble, pension funds should help. It’s counterproductive. We should never tolerate that. It’s fighting with diversification. And it’s saddling you with problems others have created.

DE: Are politicians proposing taxes on pension funds to bail out the mortgage markets?

AvN: No, [politicians say] we should buy these mortgages and maybe provide the market with direct mortgages. And when banks fix the credit market, we should finance small enterprises.

CZ: That’s exactly the pressure that politicians put on the pension funds. Because they want to have in the Netherlands, besides the banks, another [provider of liquidity].

DE: And ones that do not have highrisk investment arms?

CZ: You could change that by split- ting up the banks – into retail banks and investment banks. And if those investment banks go bankrupt, who cares? The other ones are important.

DE: Would you support that?

CZ: Yes. It could be done tomorrow. We have seen that bankers can’t handle that responsibility, so why give it to them?

DE: Let’s talk about the proposed EU financial transaction tax. Will you be affected as pension fund managers, assuming you don’t make massive amounts of trades?

CZ: Of course we are. Because we invest in funds that are trading equities. But my personal view is that it would stop speculation and those quick transfers of money floating all over the place. What you see in Germany if you are a private person, you already have a tax like that. Because if you buy equity and you sell it quicker than a period of time, then you have to pay tax on that. So a real transaction tax may not be the right idea. But a tax if you sell things in a period of, let’s say, one month – that would help slow down those stupid speculation transactions.

MvG: It looks to me as though they are using a nuke to target some ants. And they will also hit the pension funds, which are not a daily trader or position taker. So I think it’s the wrong measure.

Also, you have to do it worldwide – you cannot just roll it out in Europe. It makes no sense, because this trading is international. So if you introduce it here, they will use other trading platforms from other continents and do the same job. I think it’s the wrong tool.

GG: It reminds me a little bit of the taxes on cigarettes. They keep on increasing the tax, because it’s very unhealthy for you to smoke. [But] I don’t see that people really stop smoking. But the income side of taxes at the moment is tremendously important, and even if the reason goes away, taxes will stay – that is the same thing with the transaction tax. The large traders will absolutely find ways around this. They are going to use other platforms, they are going to do it somewhere else.

AvN: This transaction tax will be something like VAT, and the consumer will pay for it in the end. So the real players who are contemplating transactions will not be hurt. I guess the introduction of the tax will not reduce transactions. And if transactions do not fall, there’s no real need for it. That goes along with the fact that institutional investors have to work in a much more complicated environment than ten years ago. A lot of things happen and the effects are much larger than they were before. That means we cannot have the static operation we had ten years ago. We are more active than we ever were. We have to be. And, tax or not, we will have to operate in the markets – not because we like transactions, but because the environment is moving so quickly.