Its that prospect thats keeping the heat on Kemna. Close to one third of our country depends on whether were doing a good job, she says. The professional challenge is immense.ABP WAS BORN ON THE SEA, DICK Sluimers likes to say. A former chairman of the Algemeen Burgerlijk Pensioenfonds board and CEO of APG since its 2008 inception, he is referring to the ABP Act, signed into law on the SS Batavier V steamship by Queen Wilhelmina in 1922. For decades the pension fund took contributions, starting at 10 percent of salaries and rising to 16 percent in 1947, and invested them conservatively in Dutch bonds and real estate. In the 1990s the government revised pension law to require funds to be organized as stichtings, or foundations, run equally by representatives of employers and employees. The new rules allowed funds to invest in a wider range of assets, including international stocks and bonds, private equity and hedge funds, and to adjust cost-of-living raises as conditions and returns warranted. In 1996 the renamed Stichting Pensioenfonds ABP took advantage of the new freedoms and embarked on a diversification of its portfolio under then-CIO Frijns. Crucially, Frijns and his team decided to manage as much of the portfolio in-house as possible rather than hiring external managers. We decided we didnt want to outsource everything, because it was too costly, says Spijkers, who joined ABPs legal department after graduating from law school in 1984. So Spijkers and three colleagues packed up and moved to New York in August 1998 to open a U.S. office and build up ABPs investments in U.S. real estate, bonds and hedge funds. Today, Spijkers is president and CEO of APG Asset Management U.S., and oversees a 110-strong team, only seven of whom are Dutch. Overall, Kemna and an investment staff of 200 manage 80 percent of APGs assets in-house. In 2002, Frijns launched a fund-of-hedge-funds portfolio in Amsterdam, but he soon realized it would be more cost-effective to build a team in the U.S. He hired Tom Dunn and Ira Handler, then co-heads of fixed income at Lazard Asset Management, to run the portfolio out of New York. In 2006 they began operating autonomously as New Holland Capital, in the Chrysler Building, near APGs Third Avenue office. APG figured that giving the team greater independence would foster stability and avoid attrition, Spijkers says. There are a lot of people out there who invest in hedge funds and dont know what theyre doing, he notes. Today, New Holland, working solely for APG, has 26 employees overseeing 60 different hedge fund investments worth a total of 11.7 billion, or 4 percent of APGs overall portfolio. When Frijns stepped down in 2005, ABP tapped Munsters, a rising star in Dutch pension management, as his replacement. Munsters, then 42, had served seven years as CIO at PGGM, the Netherlands second-largest pension fund, expanding aggressively into alternatives and making the fund one of Europes largest private equity investors. Munsters brought a similar approach to ABP, setting out to increase the innovation, and complexity, of the giant fund. He brought in a former head of research and strategy at PGGM, Gerlof de Vrij, to head up the new, 2.3 billion, internally managed global tactical allocation portfolio and hired Wuijster, former head of investment research at Robeco, as ABPs new chief of strategy and research. In a 2007 profile Munsters told II, We can and should be at the forefront of innovation because of our in-house capabilities, size, long-term perspective and high risk tolerance. In 2007 the new Dutch pension law overhauled governance rules, requiring pension boards to either jettison ancillary businesses such as insurance, which funds like ABP had expanded into, or turn asset management over to outside entities. ABPs board, like PGGMs, decided to spin off its investment management and fund administration operations into a 100 percent-owned subsidiary dubbed APG, with Munsters continuing as CIO. Some doubted the wisdom of the separation. I warned them personal experience had taught me it would introduce organizational complexity, recalls ABP external investment committee member de Bever. Buying and selling assets is easy in a single-client environment. With multiple clients there is an obligation to demonstrate that transactions on behalf of one client treat all others fairly. Nonetheless, the breakup went ahead. Olaf Sleijpen, director of pension supervision at De Nederlandsche Bank, the central bank, acknowledges that the governance changes make it harder for pension trustees to be in control. But he points out, You create a much clearer business relationship between pension service providers and the board.
It would be hard to imagine a more challenging time to launch a new fund management entity. By March 2009, just 13 months after its launch, APGs portfolio had plunged 20.2 percent, losing 44 billion. It was a mind-boggling number, says Munsters, who worked hard to keep up his staffs morale while meeting regularly with ABPs bestuursbureau to keep them informed of their funds performance. He also negotiated a merger with Cordares, the building and construction industry pension manager, in September 2008. In early 2009, Munsters was offered the role of CEO of Robeco, the biggest Dutch mutual fund manager. APG would need a new CIO to lead a turnaround.ANGELIEN KEMNAS ROOTS WERE formed in the soil of Dutch farmland. Her parents were both born to farmers in Twente, a region in the eastern Netherlands where agriculture is still the No. 1 industry. After World War II, Kemnas father left the family farm and, with his young bride, set out to find work as a bookkeeper, while taking night classes to earn an accounting certificate. Kemna, born in 1957, the second of four children, grew up in modest circumstances. The family moved each time her father changed jobs, until he obtained a management role in a company that manufactured fishing nets and rope; Kemna would help out with accounts and administration in the summers. After scoring well on the high school placement exam given to 12-year-olds, Kemna was accepted at a gymnasium, the highest level of secondary education, near her home in the southwestern Netherlands. She discovered a flair for leadership when she organized a girls basketball team at the small, monk-run school and coached them to win four regional trophies. Upon graduation Kemna enrolled at Erasmus University Rotterdam, where she studied econometrics and met her husband-to-be, Aart van Beuzekom, who shared the same major. After eight years together they married in 1985. Three days after their wedding, Kemna left for the U.S. alone to do a six-month stint as a visiting scholar at the Sloan School of Management at the Massachusetts Institute of Technology. There she took a class in derivatives with Robert Merton, who would help her with her Ph.D. thesis and later share the Nobel Prize in economics for his work on the Black-Scholes formula for pricing stock options. Returning home, Kemna earned her Ph.D. in finance at Erasmus in 1988, writing her thesis on the use of financial options in investing. She and van Beuzekom began investing on the European options exchange and started a vacation fund with their gains. If we did well, we went to India, the U.S. and Africa, recalls Kemna. When it came time to plan a family, the couple agreed that each would take a 50 percent share of parenting duties. You had day care, which enabled me to become an associate professor, explains Kemna, who taught finance at Erasmus from 1988 to 1991, then took a part-time teaching stint at Maastricht University from 1993 to 1999. Her husband started his own software company, Ortec, in 1981, giving him the flexibility to help raise their son and daughter. That turned out to be a good choice. Today, Ortec provides everything from transportation logistics software to asset-liability studies to some 1,350 customers in more than 60 countries. On the strength of her reputation in the application of derivatives theory, Kemna was recruited into the world of asset management in 1992 by Rotterdam-based Robeco. She started as head of quantitative research, leading a group of Ph.D. candidates. She then switched into portfolio management from making the models to investing the money, as she puts it heading a team of 50 in global equity management and helping to bring quant techniques into the mainstream at Robeco. By 2001 she was director of investments and account management. Then ING came knocking, hiring Kemna as global CIO of the banks asset management division. She arrived just as the fallout from the burst dot-com bubble was hammering equity markets and almost immediately had to begin cutting costs and rationalizing operations. A year later ING split its global asset management business into three regions. Kemna requested and won the jobs of CIO and CEO of the new European region. She would no longer just crunch market data. Now she had to learn how to oversee investment technology, human resources and marketing, among other things an experience that would be daunting but invaluable. I had demanded that job, but Im not sure I knew what I had asked for, she says. As it recovered from the 2002 downturn, ING began a period of rapid growth and change. Over six years Kemna, who shed the CIO role in 2004, reported to four different executive board members. In April 2007, overseeing 152 billion in assets across 14 countries, Kemna announced that she would leave ING that July. Increasingly, she had felt that asset management was not a good fit for a former academic who wanted to do work that would benefit others. There was nothing more that excited me, she explains. I was fed up with the general culture in the financial industry. I had just had it. Her timing was impeccable: ING shares were trading at 35 when she exercised her stock options; they would touch 2.30 in March 2009 and are still below 5.60 a share. It was a lucky coincidence, says Kemna. Over the next two years, Kemna would split her time between the Netherlands, where she taught econometrics part-time at Erasmus, and Atlanta, where she and her husband had bought a house to be near the headquarters of Ortecs largest corporate client. She also served on the Authority for the Financial Markets, the Dutch securities and investments regulator, and took on a few nonexecutive directorships, including one at Yellow&Blue Investment Management, a Dutch renewable-energy venture capital company. It would be two years before a recruiter called Kemna about the CIO position at APG. It was the first phone call where I said I wanted to look at the job, she recalls. I thought it was a pretty good job, managing the pensions of 33 percent of the countrys inhabitants. Having spent a good part of the financial crisis in the U.S., she had seen firsthand what happened to older Americans who lost their pensions and life savings. It can happen very easily, as weve seen in the U.S. and also the U.K., she says. I wanted to make sure the Dutch system was in good shape. She had her work cut out for her. By the time she started at APG in November 2009, more than half of the countrys 650 pension funds, including ABP, had been forced to file recovery plans with the central bank. They would have three years to raise their funding ratios above the 105 percent minimum, or they would be forced to cut pensioners benefits. The challenge was compounded by the drop in interest rates, which weighed on those funding ratios. Pension trustees and rank-and-file employees angered by fund losses were calling for change. People were saying, Put the money in the bank so its safe, says the pension federations Riemen. As if those pressures werent enough, Kemna was taking over from Munsters, an icon in the Dutch pension world even after the market crash. Shifting from a culture that championed innovation to the more sober approach of a fiduciary manager wouldnt be easy. If you run an organization as if you have no client and its your money, the accountability is different than if youre a multiclient organization, Kemna says of the old ABP. The staff thought they had more leeway to invest as they saw fit. Kemna proceeded to make wholesale changes to APGs top ranks, replacing not only most of the executive board but also the CIOs of the groups two major portfolios, growth and income (which Kemna would change to listed and alternative), and the heads of trading, convertible bonds and information technology. She also encouraged her top executives to change their own personnel wherever necessary. The hardest period for me was the first three to six months, says Kemna. It was perhaps the loneliest period in my life. The CIO believed she could find qualified staff who, like herself, came from profit-oriented banks and money managers but were willing to work for less money at an institution built to safeguard the retirement savings of ordinary workers. You do it for your teacher in grammar school, Kemna explains. Ill be damned if a bank profits from my grammar school teacher. I can attract people with much lower salaries who want to achieve this. Kemna made several internal promotions to the executive board, including chief client officer Wuijster and legal counsel Warringa. As for the actual business of asset management, Kemna never questioned Munsters broad allocation strategy. In fact, she retained as much as possible keeping the alternatives weighting intact, for example, despite the clamor from pension trustees and plan members to drastically scale back risk. Its important not to give in to outside pressure, she says. We have to convince our participants that were long-term investors. In seeking to reduce risk, one of the first areas Kemna and her team focused on was the global tactical asset allocation team established by Munsters. Kemna wanted to simplify the fund by eliminating its costly and complex use of exotic derivatives; GTAA head de Vrij left in March to open a Dutch office for Blenheim Capital Management, a New Jerseybased hedge fund firm. APG also dismissed two external GTAA managers. The portfolio is now run by six external global macro hedge fund firms that were willing to jettison their use of exotic derivatives. I wanted a simpler global tactical asset allocation product, explains Kemna. She believes GTAA can produce good risk-adjusted returns by tactically moving cash from one asset class to another using futures or by trading the underlying equities and bonds. In some cases, as with emerging-markets debt, APG found it wasnt cost-effective to build a team in-house. In other areas, such as Japanese large-cap equities, Kemna decided not to hire an external manager because its so difficult to generate alpha in that strategy. Instead, APG runs those portfolios using a new, smart beta approach in which it tailors portfolios to client needs by eliminating undesirable index constituents. Nowhere has this strategy come into play as heavily as in fixed income, which represents 40 percent of APGs holdings. With Europes debt crisis continuing to worsen, APG has eliminated the bonds of highly indebted euro zone countries from its core Treasuries strategy, retaining only German, Dutch and French paper. APG has stripped convertible bonds from its fixed-income portfolios, seeing them as a mix of European midcap equities and high-yield bonds (both of which APG already owns) but inherently more difficult to value. We dont take the benchmark for granted, says Céline van Asselt, chief finance and risk management officer. In the past the benchmark was the guiding light. Today we say, Be critical. APG has also used the smart-beta approach to launch a minimum variance strategy in April. The 7 billion strategy targets global equities with low volatility and sits inside APGs 79 billion developed-markets equity portfolio, which makes up more than a quarter of the groups total. According to Wuijster, the strategy can achieve the same returns as a classic equity strategy, with 25 percent less risk. A fourth example of smart beta is APGs policy of not automatically rolling over the commodity exposure at months end, as dictated by the Goldman Sachs Commodity Index. The 11.7 billion portfolio represents a little less than 4 percent of the total; it achieved a 15.8 percent return in 2010, followed by a 6.1 percent return in 2011. Kemna and her team have found other ways to reduce risk in the developed-markets equity portfolio. The group instructed its external 130-30 managers to shift to a long-only stance and eliminate complex derivative overlays. The managers response? They said they had enough alpha left and admitted the derivatives were not so important, says Ronald van Dijk, whom Kemna hired as head of equities in August 2011 after 14 years at ING. The change had another benefit: It has reduced fees on the funds involved by 30 percent over the past year. Not surprisingly given Kemnas background, APG has increased the share of quantitative strategies in the developed-markets equity portfolio, to 60 percent from 50 percent. An additional 30 percent is managed in fundamental strategies, while 10 percent has been allocated to a new focused, or concentrated, portfolio that invests in fewer companies, with a longer time horizon and without adhering to the MSCI World Index benchmark. Not all portfolios have been overhauled. The roughly 80 billion alternatives portfolio has remained essentially intact under the command of Spijkers. But he continues to search for new, albeit simplified, instruments to diversify the 70 percent of the portfolio that is in traditional equities and bonds. He recently added a new strategy, dubbed alternative inflation basically a bond portfolio to hedge against unexpected moves in inflation. In the absence of Dutch inflation-linked bonds, Spijkers identified a large segment of nongovernment bonds that have inflation-linked income streams: utility companies. Portfolio and staff changes are only part of Kemnas strategy for improving the delivery of investment services and pension benefits to APGs clients and their millions of participants. Increasing scrutiny from oversight parties is placing continuous demands on the client management and communications divisions. Kemna has been lobbying officials at the central bank and Ministry of Finance to go back to a 4 percent discount rate, which would return her pension client to fully funded status. For his part, pension supervisor Sleijpen is not swayed. If central banks did not keep interest rates low, he says, the value of pension funds would be much lower today. With her new staff in place to handle APGs many asset management programs and external demands, Kemna is closer to achieving the goal that brought her back to the asset management world: the continued success of the Dutch pension system. She advised the U.K. government as it was setting up its new defined contribution scheme, the National Employment Savings Trust (NEST), which has created a large pool of individual retirement assets, while acknowledging that the new program doesnt approach the level of benefits in the Netherlands. While attending a pension conference in the U.K. last fall, Kemna says, I was shocked to see how far theyve moved from defined benefits to savings. People dont save because its voluntary there.
Thats not a problem in the Netherlands, given the pension systems strong funding. But Kemna and her team need to generate consistently good returns to provide security for ABPs beneficiaries. Simple? Hardly, but Kemna is more than up for the challenge.