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ALTERNATIVE INVESTMENTS - Man on a Mission

While boldly boosting an already sizable bet on alternatives, ABP investment chief Roderick Munsters is making the Dutch pension fund giant an activist to be reckoned with on both sides of the Atlantic.

Roderick Munsters is on a mission. Since taking over as head of investments at ABP in the Netherlands just over two years ago, the 44-year-old has begun a far-reaching overhaul of the Dutch pension fund giant’s E209 billion ($278 billion) portfolio. He is ramping up ABP’s allocation to alternative investments from an already sizable 18 percent when he arrived to a whopping 26 percent by 2009, a move that will easily rank it among the world’s biggest investors in alternatives. Munsters has launched a new internally managed hedge fund, raised allocations to commodities and plans to invest in timberland for the first time. He recently opened ABP’s first outpost in Asia. Aggressive and farsighted, Munsters is also taking ABP’s formidable reputation as a shareholder activist to new heights, leveraging the U.S. courts.

Munsters is putting his mouth where his money is. He is speaking out forcefully against potential European Union regulations requiring more stringent solvency ratios that would, he asserts, hurt pension funds by “removing the risk from the portfolio and forcing them to invest more in long-dated bonds with only the certainty of lower long-term investment returns.”

All of these moves are designed to improve performance and better position the fund — the third biggest in the world — to provide reliable, inflation-adjusted retirement income to its 2.6 million participants, while placing ABP in the intellectual vanguard of pension funds around the world.

“We can and should be at the forefront of innovation because of our in-house capabilities, size, long-term perspective and high risk tolerance,” says Munsters. “We do not need to buy off-the-shelf solutions.”

Munsters’ ambitions mark the latest stage in the remarkable transformation of a once-sleepy pension fund created by the Dutch government in 1922 for public sector workers like teachers, the police and the judiciary. Until the mid-1990s, ABP was largely constrained by law from investing outside the Netherlands and had to stick to the safest of investments, such as real estate and Dutch government bonds.

Today’s ABP is anything but sleepy. In a new corporate governance code published in May, Munsters set an ambitious goal for the fund: to cast votes at every shareholder meeting convened by its 5,000 portfolio companies. This year he expects ABP to vote at more than 3,000 meetings, up from a little more than 1,000 in past years. He plans to focus on Dutch companies in which the pension fund has large stakes and those he views as having significant governance shortcomings.

Munsters isn’t afraid to make waves. Under his leadership ABP recently weighed in on the takeover battle for ABN Amro, helping spearhead a campaign to persuade the Dutch bank to put its proposed sale of LaSalle Bank in the U.S. — part of a deal to sell itself to the U.K.’s Barclays — to a shareholder vote. The sale was later blocked by a Dutch court in response to a lawsuit filed by the VEB, a Dutch shareholders’ association. (ABN Amro has appealed to the Dutch Supreme Court; a ruling is expected in mid-July.)

Across the Atlantic, ABP has taken an increasingly combative approach, opting out of class-action lawsuits favored by most pension funds to pursue its own claims against U.S. corporations. Munsters recently added a new, more pugnacious twist by rallying 25 mostly Dutch pension funds in support of a complaint filed in New Jersey district court against a European company — the Anglo-Dutch oil giant Shell, whose reserves shortfall, disclosed in 2004, led to a $100 billion overstatement of future cash flows, resulting in steep investment losses, investors claim. The lawsuit, designed to prevent ABP and its peers from being shut out of a settlement with U.S. investors, forced Shell to the negotiating table. It comes after a major legal victory for ABP and roughly a dozen other shareholders last year against News Corp. After the investors filed a lawsuit in a Delaware court, the media giant agreed to seek shareholder approval before extending the duration of its poison pill.

“ABP is breaking ground and leading the activism charge in Europe, just as CalPERS did in the U.S.,” says G. Anthony Gelderman, an attorney at law firm Bernstein Litowitz Berger & Grossmann in New York who advises European investors in U.S. class-action suits.

Munsters might seem an unlikely candidate to lead the way to modernization in the pension fund world. He has worked most of his life in the Dutch province of Noord-Brabant, a region in the south of the Netherlands where he grew up and still lives with his wife and two children. “I’ve never left, and it feels pretty good,” he says.

Yet the Dutchman’s folksy demeanor belies a fierce drive to succeed that he honed during seven years as chief investment officer of the Netherlands’ second-biggest pension fund, Zeist-based PGGM, which has about E85 billion in assets and serves 2 million current and former health care and social workers. In a series of moves that would foreshadow his agenda at ABP, Munsters overhauled the investment team after joining PGGM in 1997 and orchestrated a radical shift into alternative investments, positioning the fund as one of continental Europe’s largest players in private equity.

“We defined our strategy as long-term risk-taking,” says Jean Frijns, ABP’s previous CIO, who retired in 2005 and recommended Munsters as his replacement. “Roderick had followed that strategy at PGGM even before we did.”

Now Munsters must translate his activist outlook and penchant for alternatives into stronger performance at ABP. In the five years through 2006, the pension fund delivered an average annual return of 7.3 percent, compared with PGGM’s 8.7 percent, according to the Dutch Association of Industry-wide Pension Funds. Last year, Munsters’ first full calendar year as CIO, ABP returned 9.5 percent, outperforming the unweighted average of 9.1 percent for all Dutch pension funds but still trailing PGGM, which returned 10.2 percent. ABP also fell short of other major pension funds, including the California Public Employees’ Retirement System, which manages $246.5 billion in assets and was up 15.7 percent, and the BT Pension Scheme, which oversees £38.4 billion ($77 billion) in assets and returned 12.7 percent.

For Munsters and ABP the stakes are high. Traditionally, ABP has fully indexed its workers’ pensions to wage inflation, a policy that is widely viewed as an important component of the social contract in the Netherlands. Following steep investment losses in 2002, however, the fund was forced to begin partially indexing wages for the first time in its history when its ratio of assets to liabilities fell to 103 percent using the then-standard discount rate of 4 percent, dangerously close to the 100 percent minimum set by the Dutch pensions regulator. (ABP’s funding ratio peaked at 141 percent in 1999.) At the end of last year, the ratio had rebounded to 133 percent — based on new rules that require pension funds to report their liabilities at market value — and could exceed 140 percent when ABP announces its half-year results in mid-July, thanks largely to rising interest rates that reduce the present value of future pension obligations. If that happens, the fund’s board of trustees is likely to reinstate full wage indexation in November and make up for missed indexing in the past, adding to the pressure on Munsters to deliver superior investment results.

“Roderick has spent a lot of time motivating investment managers and raising awareness of the need to produce required returns to meet the pension promise,” says Philip Lambert, chairman of ABP’s investment committee and a former head of the pension fund at Unilever, the Anglo-Dutch consumer products company.

Delivering consistently strong performance at a giant pension fund that began life as a government bureaucracy and now employs a 420-person investment staff won’t be easy, observers note. But Munsters’ peers in the pension world say he is the right man for the job.

“Roderick is prepared to stick his neck out,” says Claude Lamoureux, CEO of the Toronto-based Ontario Teachers’ Pension Plan, which manages C$106 billion in assets ($99 billion). Of course, he adds, “if he doesn’t do well, he’ll be out of a job.”

Managing the investment portfolio at ABP, the country’s largest pension fund, is a vital job in the Netherlands. The fund counts among its members roughly one out of four Dutch families — of whom 1.1 million are active civil servants. This year ABP expects to collect premiums of about E8 billion, up from E6.5 billion last year, when it paid benefits of E6.1 billion. A board of trustees made up of six members each from trade unions and the government, along with an independent chairman, provide oversight. Like all Dutch pension funds, ABP is regulated by the Dutch Central Bank.

To help fund its beneficiaries’ retirements, ABP takes 14 percent to 15 percent of active workers’ gross wages; of that amount, 70 percent is paid by the employer or government and 30 percent is paid by the worker. ABP’s members receive on average an annual pension of E12,000 from the fund and a further E12,000 from the Dutch state’s pension scheme.

In the 1970s the government moved ABP from the Hague, the nation’s seat of government, to Heerlen, in the south of the country, to replace jobs lost by the coal mining industry. The pension fund remained an investments backwater until then-CIO Frijns successfully campaigned for a liberalization of its investment guidelines and, in 1996, ABP’s privatization. That year, ABP became a foundation, with the government — and therefore Dutch taxpayers — acting as the plan sponsor. Workers were given the right to leave ABP and choose their own pension arrangements.

Frijns began overhauling asset allocation, boosting exposure to international equities and reducing fixed income. He set up the investment division, called ABP Investments, in a modern headquarters adjoining Amsterdam’s Schiphol Airport. He moved into private equity and opened an office in New York in the late 1990s to expand into U.S. real estate and to diversify the fund’s fixed-income investments.

In 1999, ABP teamed up with PGGM, where Munsters was then CIO, to buy Dutch investment bank De Nationale Investeringsbank, or NIB, for $2.2 billion from the Dutch government, with the aim of setting up a separate private equity, fixed-income and structured-products investment manager. The following year, NIB bought private equity group AlpInvest for E820 million.

But political opposition to the Netherlands’ two largest pension funds owning an investment bank proved insurmountable. ABP and PGGM closed the investment arm in 2002 and folded it into ABP’s operation. They later spun off AlpInvest into a separate company that the pension funds still jointly own and sold NIB’s merchant banking business for E2.1 billion to an investor group led by former Goldman, Sachs & Co. banker J. Christopher Flowers in August 2005.

Frijns also charted ABP’s move into hedge funds, beginning first with allocations to funds of funds in the Netherlands. In October 2002 he hired Ira Handler and Tom Dunn, then co-heads of fixed income at Lazard Asset Management, to head ABP’s hedge fund business in New York with a mandate to begin direct investments in hedge funds.

Despite these moves, ABP ran into trouble. With stock markets and interest rates falling, the fund lost 7 percent in 2002, and its declining funding ratio caught the attention of the Pensions and Insurance Supervisory Authority of the Netherlands, a regulatory body that became part of the central bank in 2004.

“We constantly had to explain why performance had gone down,” recalls René Maatman, ABP’s chief legal counsel.

In response the pensions regulator announced in 2004 a new framework that would ultimately require pension funds to achieve a minimum funding ratio of 125 to 130 percent beginning in 2007. Pension funds already reported their assets at market value; under the new regime, they had to begin marking their liabilities to market as well, rendering ABP and its Dutch peers even more vulnerable to fluctuations in interest rates. ABP’s board of trustees also sprang into action. In 2005 it mandated that the pension fund refrain from fully indexing pensions to wage inflation until it boosted its funding ratio to 140 percent.

Despite the turmoil in 2002, Frijns stayed the course on the investments front and even added more equities to ABP’s portfolio, assuming correctly that markets and interest rates would rebound and restore the pension fund’s financials. By the end of 2004, the funding ratio had risen to 121 percent.

Frijns retired the following year at age 58 and recommended that ABP’s board of trustees, chaired by Elco Brinkman, hire Munsters as his replacement. Frijns knew Munsters as a friend and had worked with him closely on the takeover and sale of NIB as well as the acquisition of AlpInvest. For Munsters the ABP job offered the chance to run the country’s top pension fund. “Opportunities like this don’t come every day,” he said at the time.

The investment chief is a quintessential Dutchman. He grew up in the small town of Valkenswaard, close to Eindhoven in southern Holland, where the Philips family founded their famous lightbulb factory in the late 19th century. His father worked as a patent translator for Royal Philips Electronics. “We tend to be able to combine hard work and enjoy life in the south,” says Munsters, who unwinds by coaching the local hockey team and tinkering with his two classic cars.

Munsters stayed close to home for his studies, pursuing a degree in business economics at Tilburg University in the province of Noord-Brabant. He showed an early flair for entrepreneurship, launching a marketing consulting firm together with another student that targeted small and medium-size companies.

“I made money and enjoyed the good life,” Munsters recalls. “But the business took up all my time.”

Munsters sold his share of the firm and remained in Tilburg to complete a master’s degree in finance in 1992. His thesis at Tilburg University’s Tias Business School focused on the U.S. asset-backed securities market and the potential for such a market in the Netherlands. Munsters’ prescient conclusion: Credit-enhancing products would increasingly be in demand.

After graduating Munsters landed a marketing job in the Dutch division of U.S. oil giant Exxon Corp. but found the work boring. He left after one year. “I couldn’t unleash my creativity,” he says. “There was too much routine.”

Impressed by Munsters’ thesis, a former finance professor recommended him as a fixed-income manager at Tilburg-based insurance firm Interpolis, where he excelled at playing convergence trades between European currencies ahead of the introduction of the euro. “We operated like a fixed-income arbitrage hedge fund,” he says. “We made a lot of money for the company.”

Munsters completed stints running fixed income, equities and capital markets but became dissatisfied when Interpolis merged with banking group Rabobank and shifted its investment department to the bank’s asset management arm, Robeco. “I thought it better for a large insurance company to have its own investment department close to hand,” says Munsters.

The future ABP investment chief was still largely unknown in the financial services community in the northwest of the Netherlands. But that changed in 1997, when PGGM tapped the then-34-year-old as chief investment officer. Dick de Beus, then chairman of the board of managing directors at PGGM, says he was impressed by Munsters’ hands-on expertise, intelligence and lack of arrogance. “He convinced me that he had great potential to become a strong leader,” says de Beus.

Munsters overhauled the investment team, replacing the heads of fixed income and equities, among others. In addition to boosting PGGM’s commitment to private equity to 4.8 percent of the portfolio, up from zero, he moved the fund into commodities for the first time and diversified its fixed-income investments beyond Dutch and German government debt, into high-yield and emerging-markets bonds. He also steered PGGM toward socially responsible investing and corporate activism.

The moves paid off. PGGM reported above-average annual returns of 15 percent in 2003 and 10.9 percent in 2004. By comparison, ABP returned 11 percent and 11.5 percent, respectively.

When Munsters took over as CIO of ABP in April 2005, he inherited a portfolio that was reasonably diversified by the standards of many pension funds. Its weighting in alternatives included a 10.4 percent allocation to real estate, a 3.1 percent allocation to private equity, a 2.4 percent allocation to commodities and roughly 2.5 percent in hedge funds. The remainder of the portfolio was split between fixed income, at 43.2 percent, and equities, at 38.3 percent.

Still, Munsters diagnosed a lack of direction and not enough focus on results. One of his first moves was to revamp the investment team. He poached Gerlof de Vrij, former head of research and strategy at PGGM, to head up ABP’s new E2.3 billion internally managed global tactical asset allocation portfolio, which targets returns of 5 percent above cash. The CIO also tapped Ronald Wuijster, former head of investment research at Robeco, as ABP’s new head of strategy and research. In that role Wuijster implements asset allocation decisions, works on asset and liability management as well as risk budgeting and coordinates the hunt for new investment opportunities.

Munsters is also reshaping ABP’s operations. In January he opened a Hong Kong office to tap into private equity, real estate and infrastructure investments in Asia. Last year he spun off the pension fund’s New York hedge fund arm into a firm called New Holland Capital, which is owned by its principals. The move was prompted by a desire to provide the business with greater freedom over salary decisions — and to avoid conflicts with lower-paid staff at ABP headquarters. Based on the 66th floor of the iconic Chrysler Building, New Holland Capital continues to handle all of ABP’s hedge fund investments and is still run by Handler and Dunn (through a spokesperson, both executives declined to comment). Today about 85 percent of ABP’s 3.5 percent allocation to hedge funds is held through direct investments, with the remainder in funds of hedge funds. The hedge funds ABP invests in and the fees it pays are both closely guarded secrets.

At the beginning of the year, Munsters outlined a new three-year investment plan that aims for an annual return of 7 percent and underscores the increasingly central role that nontraditional investments will play. The CIO’s targeted alternatives allocation of 26 percent includes 5 percent weightings in private equity and hedge funds, 9 percent in real estate, 3 percent in commodities, 2 percent in infrastructure and 2 percent in an “innovation portfolio” composed of illiquid investments such as timberland. (The pension fund is in the process of selecting an external timber manager and expects the investment to return about 8 percent annually.)

ABP manages all its private equity investments through AlpInvest Partners, the joint venture with PGGM that has offices in Amsterdam and New York. With more than E30 billion in assets under management, AlpInvest is one of the biggest private equity firms in Europe and plans to invest about E500 million in clean-technology companies, among other initiatives. It recently participated in the E8.3 billion buyout of Royal Philips Electronics’ semiconductors business as part of a consortium that included Kohlberg Kravis Roberts & Co. and Silver Lake Partners. AlpInvest was also in the investor group that in May 2006 acquired the Netherlands’ VNU, the world’s biggest market research company.

In addition to upping the ante on alternatives, Munsters is raising the risk profile of ABP’s traditional investments. He intends to scale back exposure to developed-markets equities as well as corporate and government bonds and boost investments in emerging-markets stocks, from 3.5 percent to 5 percent of the portfolio. ABP’s investments in emerging markets are currently overseen by external managers, but that may change, says strategy and research chief Wuijster. “We’re getting to a size where it might make more sense to run part of this money internally.”

That requires investment talent, of course. But ABP’s senior team acknowledges that it has been difficult to attract and retain top managers. Even though it is independent from the government, the pension fund still can’t compete with salaries in New York or London. A case in point: ABP recently lost Erik Rubingh, head of quantitative equity, to F&C Investments in the U.K. Munsters says he has hired between 80 and 100 people since joining ABP, mostly because of turnover. The CIO himself earned E547,996 last year, including bonuses, a fraction of what he could make in the private sector in the U.K. or the U.S.

When Munsters joined ABP, the pension fund was no stranger to shareholder activism. In the late 1990s it pushed to reform governance practices at Dutch companies — for example, by successfully attacking the management structure at software group Baan Co. and the voting structure at CSM, a bakery supplies and food ingredients company. ABP has also long been active as a socially responsible investor.

Following the accounting scandals in the U.S. that ensnared such companies as Enron Corp., WorldCom and even AOL Time Warner, ABP became one of the first European funds to take action. “The management of claims caused by accounting frauds really matters from an investment standpoint and impacts our balance sheet,” says ABP legal counsel Maatman, who has worked at the pension fund since 1988.

When its losses come to $20 million or more, ABP considers seeking lead plaintiff status in class-action suits — or even opts out and goes it alone. ABP has opted out of U.S. class-action suits against American International Group, AOL Time Warner, Bristol-Myers Squibb, Nortel and Quest Communications International. It has also filed to become co-lead plaintiff in cases against Dell and Delphi Corp.

The case against Shell marks a new level of activism: It is the first time that ABP has used the U.S. courts to attack a European company. The pension fund was worried that Shell would strike a deal with U.S. investors in an American court that excluded or disadvantaged European claimants, which haven’t yet won approval from a judge to participate in the U.S. class-action suit.

“All shareholders should be treated equally no matter where they are located,” says Maatman, who contacted PGGM to rally support for the case. He won PGGM’s backing — and later that of 24 other mostly Dutch institutions. Together the group launched a lawsuit against the Anglo-Dutch oil giant in the U.S. District Court of New Jersey in January 2006, claiming damages as a result of the reserves restatement. ABP figures it lost $55 million.

The suit, still pending, represents the first time that many of the plaintiffs, including PGGM, have taken to the U.S. courts. “ABP had more experience in U.S. litigation, and we were able to learn from them,” says Gerard Fehrenbach, an attorney and senior adviser for responsible investment at PGGM.

In December 2006, Shell added a wrinkle in the battle by contacting ABP and PGGM with an offer to negotiate a settlement under a Dutch law that allows for the collective resolution of disputes. ABP and PGGM accepted the Shell offer and negotiated on behalf of the other investors, along with the VEB. Without admitting wrongdoing, Shell agreed to pay $352.6 million, plus administrative costs, to investors covered by the settlement, enabling claimants to recoup 10 percent to 13 percent of their losses. Although the investors would likely get more money in a settlement in a U.S. court, the risk remains that they could be legally excluded from claims there.

ABP and its fellow claimants consider the deal fair. “The amount of the European settlement took into account the risk of not being included in any U.S. action and the risks of filing a lawsuit in Europe,” says Jay Eisenhofer, who as managing partner at law firm Grant & Eisenhofer in Wilmington, Delaware, is representing the European investors in the Shell talks.

Still, there is more work to be done. Under Dutch law, the Amsterdam Court of Appeal must approve the settlement — and can even declare it binding on investors who bought their shares on stock exchanges across Europe. To strengthen their case, ABP and PGGM have rallied the support of about 50 investors from nine European countries, including AXA Investment Managers, a unit of French insurer AXA Group, and the U.K.’s Morley Fund Management.

ABP needs to gain “the maximum support of former Shell investors to illustrate to the court that the settlement is fair and reasonable,” says Maatman. Hearings are scheduled for later this year, but a decision is unlikely to be reached before 2008. If unsuccessful, ABP and its allies are free to continue pursuing their U.S. claim.

For Munsters and his team, the Shell case is just one front in the ongoing struggle to protect ABP’s sizable interests around the world. Together with the CIO’s bold asset allocation policy, this increasingly activist stance is designed to boost long-term performance and maintain an investment edge in an era of excess liquidity. “There is a great deal of money in the capital markets chasing the same opportunities,” Munsters concedes. “That’s a bit worrying.” His peers in the pension world, similarly starved of easy opportunities to deliver alpha, will be watching this two-pronged Dutch experiment closely.