Meanwhile, Dutch institutional investors are in an ever-tightening vice – on the one hand, they must find higher-yielding investments in a low-interest world; on the other hand, Solvency II puts pressure on them to reduce their risk and increase their liquidity.
Developed equities, the usual engine of capital growth, is highly uncertain and the recent increased volatility also hurts risk budgets.
In step the newly emboldened emerging markets, with investment-grade government debt, and high performance of local currency versions; emerging equities divide the community with some upping weightings and others decreasing; corporate governance comes to the fore with ethical funds proving very interesting.
Add to that the ongoing interest in absolute return strategies and the asset management industry still has a lot to offer.
• Pension age debate: Plan to raise Dutch state pension retirement age from 65 to 66 in 2020, to 67 by 2027, is disputed by unions.
• New government: New minority government is formed by Prime Minister Mark Rutte’s VVD party with Maxime Verhagen’s Christian Democrats.
• Wilders in court: Geert Wilders, whose right-wing Freedom Party is essential in propping up the government, goes on trial for inciting hatred of Muslims.
What everyone is talking about
• Emerging Market Debt: local v hard currency
• BRICS: still the only game in town?
• Ethical Funds: The corporate governance angle
• Fixed Income: the challenge of finding yield
• Liability hedging: efficiently reducing exposure
• Solvency II: increasing returns without disturbing the regulators
Key points of the four biggest interviews
Head of investments, independent private bank
• Long only will go away, expect more 130/30 type funds
• Tactical Allocation will become more and more important, in particular risk allocation
Managing director, collective pension administrator
• Duration hedging will become more important
• Inflation could be a worry
• Risk Management has become much more important, ie reduction of risk in extreme events
• credit risk as part of a portfolio
Managing director, independent wealth manager
• Managed futures are an important tool.
• Regulation is becoming more and more complicated
• Newcits could be a big risk, investors should look into strategies very closely before investing
Senior investment strategist, active asset manager
• Solvency II is getting pension funds in trouble
• Index links are important
Interviewees have grown more and more attracted to the concept of open architecture. Despite only few players in the market providing a true open architecture, the advantages of such systems have not gone unnoticed.
In many cases the internal asset management obviously leads to some in-house biases. Due to the merger activities in the investment industry, investors are able to draw information from resources from other, previously inaccessible resources. In some cases this means teams operate across borders.
Tactical Asset Allocation
During the research interview partners were frequently addressing the issue of tactical asset allocation. Institutional investors are aware of the investment expertise that external partners had, leading to assets being outsourced.
However, it appears the majority of mandates are not discretionary. In most cases investors are still in charge of tactical asset allocation, leaving the asset manager to operate within a bandwidth of allocations.
In the EIE forum in The Netherlands, the delegates were asked who did their asset allocation – half the companies present have an in-house AA team; for the other half it is done by the regular fund selection team. Not one company outsourced their asset allocation.
As trends across Europe have shown, absolute return strategies are what most investors are keen to use. Performance in difficult times is crucial and with end clients and board members keeping a close eye on their money managers, this approach seems to be a preferred solution.
The only issue that crops up is how to judge the correlations of absolute returns with other strategies and so they can be used in the context of a broad portfolio.
ETFs have recently boomed. Interview partners highlight that the cost efficiency of these vehicles works on their favour. Liquidity is and will remain a long-term concern for pension funds and this asset class could offer a solution.
However, returns of active managers are recognized and their overall performances are expected to improve again.
Real estate forms a crucial part of almost every investor’s portfolio. The dividends are promising and the sector is financially backed, according to some investors. In general the market is expecting a return of this almost forgotten asset class.
Alternatives and Ucits III
As the markets are continuing to improve and deliver returns, investors are in two minds over alternative investment strategies.
The up and coming Newcits developments are dividing interviewees. On the one hand they like the idea of hedge fund strategies in a UCITs III-compliant environment, but on the other hand one should tread carefully, as some investors expect transparency to remain an issue.
A question mark hovers over some of the hedge fund managers that have gathered a large amount of assets – AUM caps should be introduced quickly.