BpfBouw, the €63bn Dutch scheme for the building sector, has stated it will keep investing in “expensive” asset classes such as private equity and hedge funds, “as their high management costs also mean risk reduction through returns and diversification”.
In its annual report for 2019, it said that higher costs through a larger allocation to illiquid assets are justifiable, because the investments contributed positively to its risk-return profile.
Although private equity and hedge funds made up no more than 7% of the fund’s entire investment portfolio, the combined costs comprised almost half of the scheme’s asset management costs of 55 bps last year.
The asset classes, however, had delivered net returns of 22.2% and 6.9%, respectively.
BpfBouw said it had already reduced private equity costs through a selection programme for investments, in order to limit performance fees in funds of funds.
It added that it had decreased management fees for hedge funds by 27% during the past five years by negotiating service fees.
That said, performance of both asset classes fell short of their respectively benchmarks last year, with private equity underperforming 8.8 percentage points and hedge funds 1 percentage point.
The pension fund reported a net overall return of 17.9%, an underperformance of 0.9 percentage point.
As most of its investments are actively managed, it said it will raise the issue of underperformance with its asset manager, APG.
Residential property
The building scheme attributed the 11.7% gain on its 16.9% real estate portfolio largely to the performance of residential property.
It said that its Dutch Residential Fund had exceeded its benchmark during the past five years.
It added that its international investments – comprising almost one-third of its property portfolio – had also outperformed, thanks to an overweighting to residential property, in particular in Germany, China and North America.
The pension fund said equity had generated 26.7%, and added that the underperformance of 2.6 percentage points was due to its quantitative and focus strategies.
Its 42% fixed income allocation had delivered 9.2% as a consequence of falling interest rates, in particular in Italy, Spain and Portugal, according to BpfBouw.
It said that profits of 9.6% and 15%, respectively, for high yield credit and emerging market debt were the result of quantitative easing of central banks.
BpfBouw’s holdings of inflation-linked bonds and non-listed infrastructure projects gained 5.3% and 21.4%, respectively.
The scheme cited recovering oil prices as well as increasing value of precious metals as the main causes for a 18.7% return on commodities in 2019.
It added that it had raised its contribution for 2020 by 2 percentage points to 22.2%, after a five-year period of stable premiums.
However, it suggested that a further rise next year will be likely, as lower allowed assumptions for future returns must be factored in.
The pension fund closed 2019 with a funding level of 112.4%, enabling it to grant its participants and pensioners an inflation compensation of 0.26%.
In April 2020, its coverage ratio had fallen to 108.7%.
BpfBouw has 146,545 active participants, 371,095 deferred members and 250,870 pensioners, affiliated with 13,105 employers.
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June 08, 2020 at 10:03PM
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Dutch building scheme sticks to 'expensive' PE, hedge funds - IPE.com
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