Larger equity stakes in individual companies will naturally boost the engagement efforts of Dutch pension funds with the companies in their portfolio, a special Eumedion working group wrote 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,” said the group, which comprises five members working for pension funds, with another six members representing asset managers.
The group also noted 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 being technology scheme PME.
However, the working group noted, that pension funds will often have to adjust their investment 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.
Eumedion, which has Lars Dijkstra, chief investment officer of PGGM, and Marcel Andringa. PME’s executive board member - equity and asset management, among its members, said that 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,” the group wrote.
To underline their long-term commitment with respect to the companies they invest in, pension funds should also consider nominating a candidate for non-executive boards, possibly in conjunction with other institutional investors with the same investment philosophy, Eumedion recommended.
Similarly, the group also suggested a pension fund could consider jointly taking a strategic stake of 10-15% in a company with like-minded investors.
Dutch companies
Eumedion noted that a more concentrated equity portfolio could result in a higher allocation to Dutch listed companies, but added 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, it added.
These can all be reasons to invest more in companies that are located closer geographically.
Finally, pension fund 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 a starting point for 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.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra
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