In May 1996, Dutch pension fund Algemeen Burgerlijk Pensioenfonds was just about to go private.
“The gigantic Dutch pension fund has finally thrown off its government shackles. Now it has five years to prove itself.”
And prove itself it did. This week, Institutional Investor Senior Writer Frances Denmark profiled APG Asset Management, which runs the pension fund.
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Institutional Investor, International Edition
May 1996
By Andrew Burchill
All seems calm inside the vast atrium of Algemeen Burgerlijk Pensioenfonds’ glass-clad headquarters in Heerlen, the Netherlands. Casually dressed employees glide up and down gleaming escalators. Cleaners dust the aspiring artists’ paintings that adorn the walls. In the basement computers quietly hum.
But appearances deceive. On the building’s upper floors, ABP chairman John Neervens and his senior management team are implementing a revolution. Their goal: to transform Europe’s largest pension fund from a hidebound state bureaucracy into a high-performance, market-driven money management machine.
For years ABP had fought the government for greater autonomy. For years the politicians in the Hague had resisted, reluctant to relinquish control over the government’s principal purchaser of public-sector debt. But last January the authorities finally relented and set ABP free. They have given the 220 billion-guilder ($136 billion) public employees’ pension fund five years to prove itself worthy of independence. If ABP succeeds, it could become a formidable competitor in the European fund management arena. But if it fails, the giant fund could disintegrate.
Neervens is under no illusions as to the obstacles he must overcome to keep ABP not only intact but growing. “I don’t have any choice,” he told Institutional Investor in a faxed response to questions (ABP is notoriously press-shy and made few of its staff available for this story). "[Our plans] are admittedly ambitious, but necessary.”
As the world’s second-biggest pension fund — only the $165 billion New York—based TIAA-CREF is larger — the newly privatized ABP confronts a series of unique challenges. Chief among these is holding on to the fund’s 1 million members who work in the eight public sectors ABP now services. ABP currently has a monopoly: Membership is compulsory until the year 2001, although a survey ABP conducted among its members last year showed that some would leave if they could. Neervens has also said that he wants ABP to become more active in corporate governance — its plans to increase equity investments from 14 to 30 percent of its total portfolio by 2000 leave it little choice. That goal would swell ABP’s current Dfl 32 billion in equities to a whopping Dfl 85 billion in five years. (ABP already owns shares in more than one third of the companies on the Dutch stock market and holds up to 7 percent of some companies.) At the same time, ABP has hinted that it may become a full-fledged money management firm, following the example of other recently privatized public-sector funds.
All these pressures explain the urgency with which Neervens and his team are now pushing for radical change. “It’s a challenge for our organization,” admits Jelle Mensonides, ABP’s recently appointed managing director of equities. “We had that monopoly, and it can let you lose your feelings for what people want. Now we’re privatized, we have to be attractive with high performance, a high standard of manager and a range of different products for our clients.”
The extent of the upheaval at ABP is mind-boggling. Nowhere is this more evident than within the 450-strong investment division, ABP Investments. This was split off from ABP Pensions, the benefits company, in 1994. Neervens and Jean Frijns, ABP’s shrewd CIO, have completely restructured the investment department, firing old department heads and hiring new ones who in turn are eager to bring in fresh talent and develop innovative products. ABP is also determined to continue increasing its international investments — which means selecting and monitoring a growing roster of external specialist managers. Meanwhile, ABP is eager to push into Europe’s fledgling defined-contributions market, offering products through ABP Verzekeringen, an insurance company it plans to establish before the end of May.
ABP was created 74 years ago by the Dutch government to cater to the retirement needs of civil servants. It was originally based in the Hague, but in a move that illustrates the extent of official control over the fund, the government simply shifted ABP’s headquarters in the late 1960s to Heerlen, deep in the south of the country, near the Belgian and German borders. The government’s aim: to bring work to the Limburg area, which was suffering from high unemployment following the closure of many of its coal mines.
For years the Dutch government severely curtailed ABP’s investment freedom (Institutional Investor, August 1986). Before 1987 foreign investments were forbidden. At home ABP could buy only companies listed on the Amsterdam Stock Exchange — and no more than 5 percent of any one company. The other big Dutch public pension fund, the Dfl 13.2 billion Spoorwegpensioenfonds, or Railway Pension Fund, based in Utrecht, faced similar restrictions (which were relaxed after it was privatized two years ago). But because of its size, ABP was governed by a special law, the General Civil Pension Act, commonly known as the ABP law.
ABP’s most onerous obligation, however, was a Ministry of Finance requirement to invest all government contributions (about one third of cash flow) in government debt. ABP invested some Dfl 2 billion to Dfl 3 billion a year in specially designed loans issued as private placements. The money soon mounted up. “When I became an agent in the 1970s,” recalls Henk Bevers, still an agent with the Ministry of Finance, “more than 50 percent of government debt belonged to ABP.”
By the late 1980s ABP was simply running out of investment opportunities at home and began vociferously lobbying the government to relax these restrictions. The fund won a small victory in January 1987, when the government permitted ABP to invest up to 5 percent of its assets abroad. Yet ABP still wasn’t satisfied. Despite good fixed-income performance from double-digit Dutch interest rates during the 1980s, ABP was well aware that over the long term, equities would offer the best returns.
One of ABP’s most active lobbyists was investment head Frijns, then head of equities, who joined ABP in 1988 from the government’s statistics department. Frijns wrote persuasive articles in the Dutch financial press, arguing the case for ABP to invest more abroad. Meanwhile, Piet Bezemer, then one of ABP’s three benefits directors, used his government contacts to lobby government officials behind the scenes. In 1993 the government gave in and permitted ABP to lift its ceiling on non-Dutch investments to 10 percent.
In January 1994 the Dutch government finally waived its demand that ABP invest a big chunk of its assets in government debt. The catalyst was the ratification of the Maastricht Treaty in autumn 1993. Among other stipulations, the treaty forbids governments from requiring institutions to buy their debt. (The Netherlands is solidly behind European economic and monetary union; the Maastricht Treaty was drafted during its presidency.)
By this time the Dutch government was also working on granting ABP full independence. In February 1991 Parliament had accepted a resolution to privatize ABP as a foundation. The decision to set ABP free was mainly a financial one, says Meindert Stelling, a lawyer working at the Ministry of Internal Affairs in the Hague, who helped mastermind ABP’s privatization. Government contributions were shrinking as the country’s deficit grew, and the government wanted to shift the burden of future liabilities onto employers and employees. The special law that had regulated ABP could thus be abolished, like other Dutch pension funds, ABP could be governed by the Pension and Saving Funds Act.
Once the decision to privatize had been made, events moved quickly. Hans Pont, director general of management and personnel at the Ministry of Internal Affairs, which regulated ABP, set up a commission to conduct an asset-liability study and examine ABP’s legal framework. In January 1992 the commission met with officials from ABP and the public employees’ unions to thrash out privatization details. At first the unions resisted; they had among the best retirement benefits programs in the Netherlands and were reluctant to risk any changes. But Pont convinced them that investment freedom would be advantageous. By June 1992 all parties had signed off on a document detailing how to revoke existing legislation and turn ABP into a private foundation. In June 1993 the government and the trustee board overhauled ABP’s top management (see box).
However, they also agreed to cocoon ABP from market forces a little while longer and make membership of the eight public-sector funds compulsory until 2001. “With so much change at ABP, we felt it wasn’t desirable for the sectors to leave,” Stelling explains. “We thought five years was a good period.” After that members are free to set up their own funds.
According to ABP, the survey among its members last fall, which was never made public, indicated that a mere 7 percent would leave if they could. Nevertheless, all of ABP’s member would benefit from improved services. “The reason [some members] want to leave,” says one Amsterdam money manager, “is because they don’t know what’s going on, they’re badly informed, and they don’t know what the investment policy is.”
ABP says it’s trying to “convince all members to stay on board” by improving customer service and investment performance, introducing new products and lowering costs. As part of this drive, ABP Pensions just appointed a new chief executive from the private sector, Jaap Maassen, former head of personnel at Royal Dutch/Shell Group’s pension fund in the Hague.
Employees in the education, municipality and water-industry sectors are certainly numerous enough to set up their own funds. KPN Pensioenfonds, the pension fund of post and telecommunications company Koninklijke PTT Nederland, did just this when KPN was privatized in 1989. Yet the remaining eight sectors are bound umbilically to ABP. Their assets are pooled in one central fund — all get the same returns — and ABP has no intention of dividing this into separate funds that would be easier to yank away. What’s more, external managers and consultants say that they dare not approach them with anything like this in mind, for fear of alienating ABP. “It would be like biting your own tail,” explains one manager.
The largest sector, education, which accounts for half of ABP’s assets, clearly intends to stay put. “Most [of our employees] said they wanted to stay,” notes Peter Holthuis, secretary general of the Ministry of Education, Culture and Science and a member of ABP’s board of trustees. “We have no intention of leaving [ABP].”
International equities
Today 25 percent of ABP’s assets consist of government debt — 26 percent of the total outstanding, according to the Ministry of Finance’s Bevers. That proportion is falling rapidly, he says. But ABP’s allocation to domestic fixed-income investments remains high: Almost 80 percent of the fund’s portfolio is invested in a mixture of highly illiquid private placements, domestic bonds and mortgages. (ABP has a separate mortgage unit that lends to the general public. At the end of 1995, it had Dfl 20 billion outstanding.) At least ABP now has the freedom to choose whether this remains so.
CIO Frijns intends to use that freedom. By the end of the decade, he expects to have radically reshaped ABP’s portfolio. He aims to trim fixed income back to 60 percent of assets, raise the equity component to 30 percent and real estate to 10 percent. Two thirds of ABP’s equity investments will be outside the Netherlands, with up to 7 percent in emerging markets, particularly Asia. ABP has also set aside money to invest in U.S. private-equity funds (previously forbidden) and a small-cap portfolio, for which details are still sketchy.
A quick thinker with a formidable grasp of cutting-edge investment techniques, Frijns is well known in international investment circles. As a part-time professor of investment science at the Free University in Amsterdam, he maintains close links with leading academics in the U.S. as well as Europe. His investment team is widely envied: experienced division heads and portfolio managers boasting several university degrees apiece, all up to speed on the latest investment techniques.
ABP has long favored shifting key personnel among departments to give them a thorough grounding in different types of investments. Equity head Mensonides is a product of this policy. He joined ABP in April 1992 as managing director of strategic investments, temporarily taking on the real estate portfolio later that year. Last July he swapped jobs with then–managing director of equities Theo Jeurissen and is now responsible for Dfl 32 billion of equity investments: Dfl 15 billion invested at home and Dfl 17 billion abroad. Before joining ABP, Mensonides, an economics graduate, worked for ten years at the Ministry of Finance. One of his main tasks there was to think up ways to cut the budget deficit.
Mensonides is now intent on improving ABP’s equity performance, which is good but not outstanding. In 1994 equities lost 1.5 percent, compared with an average loss for Dutch pension funds of 5.4 percent, according to performance measurement firm WM Co. The bulk of ABP’s Dutch equities are indexed to the market and managed in-house by a four-man team. ABP is well versed in quant techniques (Institutional Investor, February 1996) and, to add returns, also runs a Dfl 300 million quant portfolio based on a model developed with the help of investment guru Josef Lakonishok, professor of finance at the University of Illinois. The model screens for companies that fit various value measures.
Lakonishok first met Frijns and other ABP investment managers four years ago, while lecturing at the University of Limburg at Maastricht. He was much impressed. They were, he says, “open to new ideas and aware of all the research going on.” The feeling was mutual, and ABP hired him as a consultant for a year to help collect data on the Dutch market and set up the new quant model. “It went fast,” he recalls from his office in Champaign, Illinois. “A nice cooperation.”
ABP’s international equity investments, in contrast to its domestic portfolios, are managed by external specialists (ABP won’t say just how many it has already appointed, but the number is growing). Overseeing these are three regional managers, in charge of the U.S., Europe and Asia, who report to Mensonides. (Before privatization Japan was the only Asian market ABP was permitted to invest in; emerging markets were forbidden.)
ABP’s commitment to greater international investment — by 2000 it plans to increase its total foreign investments to 25 percent, from 10 percent now — has encouraged the world’s money managers to make regular pilgrimages to Heerlen in the hope of winning a piece of business. If they succeed, chances are that over time ABP will become their largest client as new money flows in. First, however, prospective managers have to survive ABP’s notoriously rigorous selection process. “It’s not our style to hire and fire a manager within a year,” says Mensonides. “We take a lot of time to hire the manager to ensure they manage the money as we want.” ABP has little use for consulting firms ("[ABP] could knock your average consultant into a cocked hat,” says one successful candidate). Instead, the fund digs into its own extensive manager database, which rates each prospect according to a seven-point check list: Performance, fee level, professional reputation, portfolio construction, risk diversification, investment process and product range are all carefully scrutinized.
House guests
Managers who pass this test can usually expect ABP staff to turn up on their doorsteps. Delegations of five or more ABP representatives have been known to arrive at prospective managers’ offices and — to the managers’ horror — stay for up to a week.
Several years ago a team of top ABP staffers jetted to Boston to camp out with a major money manager for five long days before hiring the firm. “It’s quite a strain,” remembers the receiver of the delegation. “You have to keep them busy during this time.
One British manager appointed by ABP last year recalls a seemingly endless round of presentations. “It went on for years,” she says wearily. “We did six presentations before we got the business. There were usually three people on their side. They read everything, debate it, then [seek to] understand it.” Even after that the ordeal wasn’t over. The manager still had to be approved by the investment board.
To win a mandate from ABP, managers must present a highly disciplined investment process. It helps to be a quant. Wells Fargo Nikko Investment Advisors, now part of BZW Barclays Global Investors, was first to jump through the hoops, landing a large U.S. indexed mandate in the late 1980s, shortly after ABP won its battle to start investing abroad. Since then ABP has appointed a host of other foreign managers — including State Street Global Advisors, PanAgora Asset Management, Barr Rosenberg European Management and Baring Asset Management — to run passive or active dates and sometimes both.
Significantly, homegrown money management talent is absent from this list, although privately one Dutch manager confirms that his firm has won an international mandate from ABP. However, with some exceptions, the international products of domestic investment firms are not favored by Dutch pension funds. “When they go externally, Dutch funds tend to appoint non-Dutch managers,” explains native money manager ruefully. “They see the Anglo-Saxons and Swiss as being more professional and sophisticated.”
Managing this roster of external specialists is a constant headache for the fund. Mensonides says that he and his staff have to be vigilant to maintain diversification and not end up replicating the index when it could do that itself for free. “I don’t want to manage too many managers,” he explains. “I’d rather have a core of managers who run a number of different portfolios.” ABP is now keen to augment its in-house expertise, particularly as it may want to market itself as a full-fledged money manager at some future date. “You don’t have a good story when you say, ‘We don’t manage the money; we outsource it,’ ” explains one Amsterdam-based money manager. ABP already uses its external managers as a benchmark for its in-house team and makes no secret of its desire to learn the processes it buys. But Mensonides says that outside clients are not on the agenda at the moment; he has enough on his plate improving service for his existing ones. Still, Mensonides is currently looking to hire portfolio managers to start managing some of ABP’s European money in-house. He hasn’t decided whether this money will be actively or passively managed, but he expects to have the in-house portfolios up and running early next year. He won’t be taking money away from external managers, though: The value of ABP’s European allocation is constantly increasing, thanks to the fund’s ample cash flow and increasing value. Despite its remote location, miles from the financial centers of Amsterdam and the Hague, ABP has a reputation for attracting bright young graduates. Scores of hopeful recruits have responded to press advertisements, and ABP’s contacts with Dutch universities have yielded more potential candidates. For the chosen few, ABP offers early responsibility, tremendous influence and plenty of travel. What’s more, ABP’s once-meager salaries are now in line with those paid by corporate pension funds — Dfl 120,000 to Dfl 150,000 for a portfolio manager and Dfl 200,000 to Dfl 300,000 for a senior portfolio manager.
For these reasons Mensonides can afford to be choosy. “We have high ambitions and can only achieve them by hiring good people,” he observes. He hopes to make six new appointments by the end of the year, increasing his professional equity staff to 27.
As ABP’s non-Dutch allocation grows, of course, so too do currency risk and portfolio rebalancing problems. At present ABP’s treasury department, run by Gertie Thijssen, hedges 50 percent of all ABP’s non-deutsche-mark foreign investments. Frijns plans to appoint some external currency managers later this year. As for rebalancing, that’s currently done every quarter with cash flow, helped by a tactical country-allocation model (developed with Lakonishok’s help) that uses futures. Jeurissen’s strategic investment policy unit continues to research new ways of using tactical asset allocation for the whole fund.
By 2000 Mensonides plans to invest just 30 percent of ABP’s equity portfolio in the Netherlands, 25 percent in the U.S., 25 percent in Asia and 20 percent in Europe (ex—the Netherlands). These ambitions won’t trim ABP’s Dutch bondholdings. “We won’t sell bonds to go into equities, because our growing portfolio makes it possible to increase both,” Mensonides notes. Paul Spijkers, ABP’s fixed-income head, is emphatic about ABP continuing to fulfill its social obligations toward the Dutch public sector. Loans to utilities, housing corporations and financial institutions remain a dominant part of ABP’s fixed-income portfolio. ABP’s overall fixed-income allocation, however, will decrease to 60 percent by the turn of the century. The fund has already discreetly started using swaps to alter its portfolio profile.
One inevitable result of ABP’s surge into equity investments will be a dramatic increase in its company holdings, particularly in the Netherlands. Although ABP’s overall equity allocation there is slated to fall, the volume of new money flowing into the fund will increase its investments in Dutch stocks by between Dfl 16 billion and Dfl 28 billion by 2000. ABP’s influence is already huge: It holds close to 7 percent of some companies’ stock. This in turn raises corporate governance issues. Like other indexers, ABP can’t simply sell underperforming companies, so it must influence them in other ways. ABP already discusses strategy with the boards of many companies in its portfolio. And unlike many corporate pension funds in Europe, ABP officials don’t accept nonexecutive directorships that might restrict the fund’s actions. But those anticipating a crusade similar to the one launched by the $93 billion California Public Employees’ Retirement System, which has a hit list of target companies, will be disappointed. “They are an important example in the U.S., but we’re not going to copy their strategy; I make that very clear,” Mensonides states. “The Dutch position is very different from the U.S. position.”
In the Netherlands, he contends, shareholders’ rights have yet to be precisely defined. The shareholder is in fact only one of several recognized stakeholders in a company, all of whom have rights. Confrontation is off the agenda for the time being, Mensonides says, although this will change as more U.S. and U.K. institutional investors, with stronger views on shareholder activism, buy Dutch stocks. His own attitudes may harden, he concedes, as ABP increases its international exposure.
Property problems
Real estate is another department undergoing a radical revamp. In the late 1980s ABP yearned to become a worldwide direct investor in real estate, proposing to build up its portfolio to 15 percent of assets. In 1992 the fund paid Dfl 2.5 billion for a 12.5 percent stake in property fund manager Rodamco Holdings, part of Rotterdam-based Robeco Group. (The Rodamco stake accounts for two thirds of ABP’s exposure to non-Dutch real estate.) The move outraged ABP’s in-house real estate managers, who maintained that they hadn’t been properly consulted.
But the property push — especially the direct investments — proved disastrous for ABP. Property values plummeted, and the fund was left holding billions of guilders of investments it couldn’t off-load. In late 1992 and early 1993, ABP halted the program and began to review its real estate strategy. “Property is a big problem [for the fund],” says one observer. “They have huge holdings and no liquidity.”
The result: Real estate head Sjef Palmen left, and over the next two years, the entire department was overhauled. Mensonides temporarily took over before Wim Borgdorff was drafted in from ING Real Estate in early 1995 to become the department’s new managing director. Borgdorff still plans to invest in real estate globally, because the Dutch market is so small, but with a totally different strategy: “Now we’re looking to build up a portfolio in an indirect way,” he says.
Real estate now accounts for just 7 percent — or Dfl 16 billion — of ABP’s assets: 70 percent in the Netherlands and 30 percent abroad. But that allocation is set to grow again, to 10 percent by 2000. By then, Borgdorff anticipates, overseas investments will equal domestic ones. He’s adopting a core-satellite approach to expansion: Eighty percent of the fund’s property portfolio is managed internally; the rest is handled by external managers in pooled funds. This year alone he anticipates investing between Dfl 1.5 billion and Dfl 2 billion in the Netherlands and abroad. “These figures indicate why we should invest in an indirect way,” he reasons. “To do it direct, we would have to hire everyone in real estate.”
ABP already employs almost 200 real estate staffers. Data is limited, and collecting it is both labor-intensive and time-consuming. Borgdorff, whose primary job is overseas investing, oversees only 12 of them. Last year ABP turned its Dutch property portfolio into three separate funds, with their own management companies and 160 investment professionals: WinkelBeleggingen Nederland (the retail fund), based in Utrecht; Kantorenfonds Nederland (the office fund), based in Maastricht; and Abp Woningfonds (the residential-property fund), based in Heerlen. Later this year ABP plans to start looking for outside shareholders to invest in these funds.
Chairman Neervens has worked hard during his first 20 months in office, putting together his management team and preparing to launch a range of new products. But he still has much to do. Apart from improving performance, he also needs to change the ingrained work habits of the administrative staff, who still behave as if they toil for a government bureaucracy. “The first step is to get used to serving a customer who contracts us on the same day,” he says. “We do not need to write reports about this. It simply means that employees now call home at 5:00 asking their partner to take the potatoes off the stove.”
Should all else fail, Neervens is not above using a bit of gamesmanship. He angered other Dutch pension officials earlier this year by revealing ABP’s 1995 performance — 16.4 percent— despite a gentleman’s agreement that none of them would disclose such information about their funds. “It was a good trick to show to everybody,” laughs Lou ten Cate, senior partner at Dutch consulting firm Triple-A. “He did it because bonds did very well, and he knew a lot of other funds were more heavily invested in equities and therefore ABP would be in the top ten, regarding performance.”
As ABP continues on its newly independent way, many observers will be watching closely to see if Neervens can continue to pull off the same trick in the years to come. For now he’s got a captive audience; ABP’s members have no alternative. But with the Dutch pension market becoming increasingly competitive, performance will be key to ABP’s survival in its current form. The fund seems to be moving in the right direction. If ABP had historically had the asset mix it plans to have achieved by 2000, contributions would have been much lower as the result of better returns, the company claims.
A broader product range, especially a defined-contribution option, should also help ABP not only to hang on to its current members but also to attract new clients — if it chooses. And if ABP can also improve customer service to the standard of its investment operation, the Dutch giant has a fighting chance of becoming a formidable competitor on the European money management scene.
