The Dutch pension system has particularly stringent regulation when it comes to coverage ratios.
Fall below the 105% mark and the resulting fallout means a pension fund must review its risk policy and find other ways to boost its returns to meet the coverage target.
For Inge van den Doel, head of investments for the Netherlands’ third largest pension fund PMT, that is the predicament she now finds herself in.
With a current coverage ratio of between 85-90%, her hands are tied as she is not allowed to increase the risk in her portfolio.
This situation presents investors with a Catch 22 scenario as upping risk levels is usually the way to boost returns in order to meet any target.
‘Because our coverage ratio is below the regulatory minimum we cannot afford to take on more risk so our whole investment policy is risk-driven,’ she says.
Van den Doel was appointed the pension fund’s head of investment in the summer and since then she says she has made one significant change to the way they operate.
Cost-cutting has helped to boost overall returns and her allocation to hedge funds is the first target.
‘This environment exerts a particular influence on any decisions we take in the alternatives class as this is usually the more expensive market.’
Of the €41 billion in assets she runs, 15% is allocated to alternative strategies with around half of that dedicated to the private equity sector. A significant portion of the remaining assets are in hedge funds.
Another reason to focus on costs also comes from her clients, who are from the Dutch metal workers and engineering sectors.
‘The confidence in the pension fund sector and the financial sector is very low. So there is no understanding when it comes to paying high fees,’ she says.
‘Hedge funds getting 2 and 20 is not acceptable for us anymore. For example, if one of our metal workers has a €500 pension a month they will not accept that they are investing in hedge fund managers who receive that kind of performance fee.
‘We just cannot do that anymore.’
However, the main focus of her alternative allocation is driven by her exposure to the private equity sector which, she says, is woven into the pension fund’s DNA.
‘Private equity is an asset category that we feel very comfortable with. It is different from hedge funds because it relates more to the type of pension fund that we are and who we work for.
‘We believe in entrepreneurship so we have an affinity with private equity because it is helping entrepreneurs to do their job.
‘Whereas hedge funds are really just an investment.’
Around €3 billion of the pension fund’s assets are invested in this sector and van den Doel and her team focus almost exclusively on top-decile private equity companies.
This commitment to high quality businesses means she often invests in funds run by private equity specialists.
‘A central statement in our investment belief is that the risk related to investing in entrepreneurship does pay off in the long run.
‘At the moment the majority of our private equity portfolio is in the US as it is a far more developed and sophisticated market.’
The pension fund has some investments in European private equity and van den Doel says her team is currently looking for opportunities in the emerging markets.
‘Why should we rule any region out? Emerging markets may be the future so it is unwise to ignore them. If there is a good opportunity then we will invest but in practice it is very hard to find any of these openings.’
As well as her exposure to private equity and hedge funds, van den Doel also has a small exposure to the commodities market but that is where she draws the line.
Unlike in other traditional asset classes, diversification can be counterproductive in the alternatives sector, she says.
‘We look at the triangle of risk, return and cost within the context of PMT being a large investor.
‘This means that certain investment categories are not that interesting for us because you can only get a limited portion of them. If you have too many small investments, your portfolio becomes unmanageable – risk control is more difficult in these cases.
‘We are a large investor and do not want our portfolio to be split up into thousands of components. This mainly affects the alternative categories because the others, like equities, are more easily manageable and available in large amounts.’
The Dutch group PMT (Pensioenfonds Metaal en Techniek) is the pension fund for all employees of the country’s metal and engineering industry.
It is the third largest in the Netherlands with €41 billion in assets behind the €246 billion government pension fund ABP and PGGM, the €125 billion healthcare and social work sector pension fund.
This article originally appeared in the October 2012 edition of the Citywire Global magazine.