Innovations in ABPs Investment Strategy

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Innovations in ABPs Investment Strategy

• Ronald Wuijster , ABP Investments

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• D v 13 H

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Men and Nature

• My D (horizon) is v 131,92 5 kilometers.
• Men can look 5 kilometers forward and five years
  forward?
• Limited ability to learn.
• Reason for economic cycles?

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Take risks?
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Agenda

• Introduction ABP
• Investment Beliefs
• Strategic Investment Plan 2007-2009
• A new strategic mix
• A new investment framework
• Putting emphasis on innovation
• Innovative investments strategies

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Introduction ABP(end of 2007 Q1)

• For people in service of the Dutch government and
  the educational sector.
• Around 2.4 million customers.
• Based on solidarity and non-profit.
• Among the largest pension funds in the world.
• ABP manages approximately 215 billion.
• Nominal funding ratio around 140.

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ABPs mission

• ABPs mission is to in the long run provide a
  fully wage inflation indexed pension at an
  attractive price.
• Investment Policy is focused on the long term
  balance between realizing a maximum real return
  and acceptable real risks.
• Real investment risks are reduced by diversifying
  over different asset classes, strategies and
  countries.
• Risk the chance that expectations are not
  realized

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Long term investment returns
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Investment Beliefs

• Underpinning for the way in which ABP formulates
  and implements its investment strategy.
• Beliefs are based on academic insights,
  experience and current views on critical success
  factors.
• Beliefs relate to
• (1) functioning of financial markets
• (2) benefits of being a long-term investors as
  a pension fund operator, and
• (3) success factors for an investment
  organization.

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Investment Beliefs a selection

• Taking investment risk pays off
• Diversification is a free lunch
• Financial markets are not fully efficient
• There is a premium for illiquidity
• Investing for the long term will be rewarded
• People and culture are critical success factors

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New strategic portfolio
Duration FI increased from 4.8 to 8 and US weight
in equity benchmark reduced.
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A new investment framework context

• Investment context
• Anchor A risk-free portfolio i.e., the
  liabilities
• Target Return requirement to reach our ambition
• Restriction A maximum mismatch risk
• Anchor
• Liability-matching portfolio is not available.
• Practical risk-free portfolio real bond with
  17 years maturity.
• A shift from liquid developed equity markets to
  emerging markets and private equity.
• Two investment portfolios
• Liability-hedging
• Risk-optimizing

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Liability Hedging Portfolio and Risk Optimizing
Portfolio together equivalent to the existing
portfolio
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LHP/ROP

• In the end the investment portfolio will be a
  weighted combination of LHP and ROP, dependent on
  the risk budget i.e. the risk tolerance of the
  Board of Trustees.
• Addition of cash as third asset allows for
  leveraging the risk profile (e.g. -100 cash,
  100 LHP en 100 ROP).

A weighted combination of LHP and ROP can
accomodate different risk preferences.
ROP
LHP
Its like mixing cold and hot water. By
regulating the mixer tap a wide range of
temperatures is possible!.
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Age-dependent investing
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Innovation

• A natural next step in the transformation
  process of the investment portfolio. Capitalizing
  on knowledge and skills of the organization.
• Strategic Investment Plan 2007-2009 allocates up
  to 2 of the portfolio to innovative strategies.
• Creation of an Innovation Committee that can
  identify, prioritize and resource strategic
  initiatives without a natural owner in the
  organization.
• Set low hurdle for ideas
• Enhancing returns/reducing risks of the
  portfolio
• Scalability
• Sustainable over a longer time frame
• In line with core values of the organization.

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Innovation and assets

• A test-case that will be implemented Timberland
• invest in ownership and management of productive
  forest land
• renewable resource and energy efficient material
• unique characteristics
• value added to diversify and enhance return of
  investment portfolio
• An idea that will not be implemented Cleaning
  up wastelands
• buy partly polluted land, organize area
  reclamation based on recent scientific advances
  and sell the land at a profit
• fits ABP long-term horizon and social
  responsible investments paradigm
• But
• unquantifiable risks of political nature
  (legal) definition of clean
• given these risks, scalability is questionable.

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Innovation and life expectancy

• Longevity swaps or hedging
• Longevity diversification
• What is the right price for a population?
• Trends in life-expectancy
• Use medical patents as a hedge?

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Innovation and themes

• Climate change, renewable energy, cleantech.
• Market, regulation and social cohesion.
• Ageing.
• Changes in disposible income.

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Innovation and beta

• Size
• Liquidity
• Volatility
• Momentum
• Style
• Carry

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Innovation and portfolio construction
benchmarking

• Interest rate swaps
• Inflation swaps
• Dividend swaps
• Equal weighting
• Fundamental indexing

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Innovation and ESG

• Current ESG policy is characterized by
• Active participation in dialogue with companies
  during stockholders meetings and proxy voting at
  over 3000 companies.
• Active participation in different national and
  international networks (like Eumedion, EAI and
  ICGN).
• Research related to relationship between
  ESG-factors and financial performance of
  companies (by Innovest, GovernanceMetrics and
  sponsoring of academic research).

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ESG work in progress

• Since the start of 2007, ESG factors are
  integrated in the management of the equity
  portfolios.
• During 2007, ESG factors will be integrated in
  other asset classes (like real estate and
  credits).
• Currently, ABP is already one of the largest
  Dutch investors in micro credit in the developing
  countries (currently 20 mln, expected to
  increase by 100 this year).
• ABP is an active player on emission rights
  (CO2).
• Increase in ESG efforts more capacity
  allocated, more in house research and analysis,
  more direct voting.

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To conclude

• Deal with short-termnism
• Take appropriate risks
• A long term approach
• Diversify
• Be innovative
• Be responsible
• Use your culture to your advantage.

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