Larger equity stakes in individual companies will naturally boost the engagement efforts of these investors with the companies in their portfolio, a special Eumedion working group writes in a green paper published last week. “In order to ensure that institutional investors act more as ‘stewards’ of listed companies, it is recommended that pension funds and insurers apply more focus and concentration to the equity portfolios,” says the group, which comprises five members working for pension funds, with the other six members representing asset managers.
The working group also notes that “various studies show that, if properly diversified across sectors and regions, holding shares of several hundred companies can provide sufficient portfolio diversification.” Most Dutch pension funds currently invest in significantly more companies and thus have scope to cut back.
Investment beliefs
Several pension funds have in recent years drawn up plans to put together a more concentrated equity portfolio, with the most outspoken of these technology scheme PME (link). However, the working group notes, pension funds will often have to adjust their investments beliefs and stock selection process to make such changes. Their new approach should then focus on long-term value creation and ‘know what you own’, according to the working group.
The working group, which has Lars Dijkstra (PGGM) and Marcel Andringa (PME) among its members, notes a buy-and-hold approach would be “appropriate” for such a strategy. “By consciously selecting and operating as a long-term, committed shareholder, you keep companies in your portfolio for longer. By knowing what you are investing in and actively fulfilling your role as an engaged shareholder, the investment risks over the long term should be lower,” they write.
To underline their long-term commitment with respect to the companies they invest in, pension funds should also consider nominating a candidate for the non-executive board, possibly in conjunction with other institutional investors with the same investment philosophy, the working group recommends. Similarly, the group also suggests a pension fund could consider to jointly take a strategic stake of 10-15% in a company with like-minded investors.
Dutch companies
The working group notes that a more concentrated equity portfolio may result in a higher allocation to Dutch listed companies, but adds that “this is not obvious in advance” as “it has not been scientifically proven that Dutch listed companies score by definition higher on factors such as the strategy, policy, business model, risk management and the quality of the executive and non-executive (supervisory) board members compared to their European or US peers, justifying an a priori overweight in shares of Dutch listed companies.”
On the other hand, however, Dutch investors by nature have more knowledge of the operating environment of Dutch and other North-West European companies and, due to the physical proximity, also have better opportunities to put the required closer engagement towards the companies into practice, the working group adds. These can all be reasons to invest more in companies that are located closer geographically.
Finally, a pension fund’s members could also consider it desirable for ‘their’ pension fund to invest more in Dutch listed companies, partly because a strong Dutch and European economy supported by strong Dutch listed companies is in their interest. This would then have to emerge from surveys among pension fund beneficiaries.
Speaking to IPE, Eumedion director Rients Abma stressed that the ‘green paper’ should be seen as a starting point of a discussion. “We are open for recommendations and responses from, and aim to publish a final position paper on this topic in the beginning of 2025,” he said.
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