Dutch investors are maintaining a balanced approach to any investment over the recent months. Many are keen to get back into the various opportunities that present themselves, but volatility and risk aversion keeps them from changing their current allocations dramatically.
With markets across Europe recently dropping to two-year lows and further regulation on the horizon, it remains unclear how soon assets will be shifted for the sought returns.
• Dutch investors are discussing a proposal to calculate future pension liabilities not on the current risk-free rate, but on a combination of factors, including expected returns of the investment portfolio. Liabilities and pay-outs will be calculated differently based on experiences from the financial crisis.
• According to Financieele Dagblad, the Netherlands’ biggest pension funds are considering moving away from listed company investments in order to avoid the turbulence on the financial markets.
• The European Commission has cleared French bank BNP Paribas proposed acquisition of Fortis Commercial Finance Holding reasoning the new entity would continue to face several strong and effective competitors with significant market share. The Dutch assets of FCF will remain with their current owner, ABN Amro bank.
• The Netherlands Authority for the Financial Markets (AFM) has announced that it will pay more attention to how financial institutions value and report their investments in government debt and what the possible risks are. It will also examine other investments with country risks.
What everyone is talking about
• Equities – where to find the returns?
• Fixed Income and where to find least risk
• Private equity and hedge funds are back
• Can energy investments deliver?
• Real estate, is now the time?
Size of the Dutch Pension and Insurance Industry
The Dutch pension and insurance sector is the third largest of the euro area, recent data of De Nederlandsche Bank (and the European Central Bank) show.
At the end of March 2011, total assets in Dutch insurers and pension funds was over €1.2tn, or 17% of the euro area total (€7,025bn). With €790bn, the Netherlands rank first in pension assets in the euro area while the insurance sector is the 4th largest with €410bn. In all, nearly €100 billion in pension reserves has been entrusted at his stage to Dutch life insurers.
The majority of Dutch investors seem to be pessimistic about the future of global markets and expect a double-dip recession. The chaos and the huge numbers involved in the European debt crisis has cemented the idea that we are in trouble – and even the ones who don’t believe in the recession story are preparing their portfolios for a slow recovery.
Fixed income still is the favoured asset class although it remains to be seen which products provide the best risk/return profiles. US and European sovereign debt doesn’t seem to be attractive any more, leading investors to lower their exposure.
With AAA-rated government bonds, such as France, confronted with potential downgrades, even a QE3 scenario has been mentioned. Investors still see some potential in the healthier emerging markets less affected by the western crisis, however, currency plays a significant role – local currency is preferred.
High yield still seems to provide additional returns on a risk adjusted basis with some investors eager to re-visit the whole approach to allocating to high yield. Meanwhile, opportunities are still being found in investment grade corporates and fund flows continue.
Although expected to outperform bonds, equity investments’ reputation has suffered from their continued volatile performance. Interviewees remain reluctant to make a call on when to go back into equities in any meaningful way.
US and European economic data is too diverse, so an attractive option is seen in BRIC countries and some other emerging markets. Also, investors are increasingly looking at sector-specific funds to find alpha.
Alternatives are on the up and up, in particular hedge funds, funds of hedge funds and private equity opportunities are attracting inflows.
Interviewees also indicated they are increasing their allocations to commodities; precious and industrial metals are favoured. The new energy sector is also of interest, although the amount of investment opportunities and vehicles remains limited. Investors expect further development over the next months.
As always, real estate remains an important asset class for Dutch investors. Globally markets are recovering, so they expect to be able to increase allocations in the future again.
Investors have told us they expect more regulation following the changes to funding ratios for pension funds (105%).
Interest rate risk is a particular issue for bond holders.
UCITS III and IV allow investors – especially for the smaller pension funds – to be more confident in the various products available, in particular transparency and liquidity are important. The AIFM (Alternative Investment Fund Managers) Directive is expected to further improve the current situation for those investments.
All-in-all, investors in the Netherlands have much experience in the various investment markets and therefore feel suitably prepared for any potential changes to regulation.