Shell Asset Management Company (SAMCo) is considering expanding its alternative investments to include property loans, according to its head of fixed income.
At the World Pension Summit in the Netherlands last week, Ben van den Berg said that SAMCo was looking into real estate loans for its Dutch and UK clients as “new and attractive investments” within its alternative credit portfolio.
Property loans often have a high rating, as they usually have real estate assets as collateral, he said.
However, Van den Berg said that if SAMCo were to proceed with the investments, it would outsource the work to an external manager as his company lacked the necessary expertise.
The head of fixed income explained that SAMCo had significantly raised its holdings of alternative credit as listed bonds had artificially low yields as a result of the ECB’s quantitative easing policy.
“Therefore, we have been investing in collateralised loan obligations for a while, which have a AAA rating in general,” Van den Berg said. “And during the past few years, we have also started investing in export credit and residential mortgages.”
That said, Van den Berg noted that illiquidity premiums on alternative investments weren’t consistent, and that spreads on export credit – loans to businesses involved in international trade – had decreased to 40-50 basis points.
“This isn’t enough for us, and therefore we have partially divested our positions in favour of residential mortgages,” the head of fixed income said. “These have a spread of 150-175 basis points relative to swap rates, as well as a rating of at least AA.”
SAMCo was also monitoring developments within direct lending, but Van den Berg said that “this market must develop futher before it would become investable to us”.
Liquidity
Van den Berg explained that the lack of liquidity in fixed income markets continued to be a problem, not only because of difficulties with divesting, but also that it would hamper the asset manager’s ability to benefit from unexpected opportunities elsewhere in the market.
“If you put aside assets for 20 years, you can’t deploy them in order to take advantage of market opportunities like the ones that occurred during the financial crisis of 2008/2009,” he said.
He added that pension funds should avoid their illiquidity premium turning into liquidity risk: “During the financial crisis some schemes ran into solvency problems, not because of low funding but because of a lack of liquidity.”
According to Ido de Geus, head of fixed income at the €215bn Dutch asset manager PGGM, a 25% allocation to illiquid investments was the maximum pension funds could afford.
In the past few years, PGGM has more than doubled its stake in alternative investments to in excess of 20%, he said, concluding that the allocation was about to reach its peak.
In addition to residential mortgages, the asset manager has invested in infrastructure – including solar and wind farms – and green bonds.
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