The shape of things to come

Mn Services is increasing the allocations of emerging market assets in its portfolios. Joseph Mariathasan finds out why

Emerging markets generally are seen as a critical long-term play for Mn Services, a fiduciary manager with assets under management of €59bn, and which is currently wholly owned by the two Dutch metal industry pension funds, PMT and PME. “There is a shift of power in the world and in our portfolios towards emerging markets and while this will be accompanied by a lot of volatility. We believe this is a structural trend that is irreversible.” says Wouter Pelser, (pictured right) CIO at Mn Services.

Mn invests in the full range of emerging market opportunities, which span debt, listed equities, private equity, infrastructure and real estate, and it has recently started looking at hedge funds. As Pelser admits: “People are stimulated by doing analysis on emerging markets and we will not tap into a market unless we have done our homework.”

Allocation to emerging market equities is in a stable range of around 5-7% of its assets, while the emerging market debt (EMD) allocation is currently between 5% and 8% and is increasing alongside increasing allocations to emerging market private equity and real estate. The EMD allocation represents a far larger component of its portfolio than most pension funds would have, but given that Mn has been managing EMD in-house since 1997, according to Pelser, it also reflects the confidence and experience that Mn has gained in the asset class through its own activities over the last decade or so.

Before 2002, Mn was using a trading-oriented approach according to Pelser, but in 2002, the growth of the EMD marketplace prompted the firm to adopt a new more fundamental-­oriented approach along with a new team. In addition, it decided to adopt a core-satellite approach with a large proportion varying from one-third to two-thirds of an individual client’s portfolio of EMD being allocated to external managers. Pelser says: “Our in-house team, run by Salman Saif, manages what you can do out of Rijswijk, such as macroeconomic driven portfolios, but if you want to invest in distressed debt in domestic companies, you need to outsource.”

Saif is part of a team of three fund managers and an analyst managing half of Mn’s EMD portfolio and responsible for outsourcing the other half.

Saif says they see their role as providing access to the whole universe of EMD sub asset classes ranging from hard currency debt to restructuring plays in local currency. He does not make a distinction between hard currency and local currency sovereign debt, but rather between sovereign risk as a whole, plain vanilla corporate risk and exotic corporate risk. The internally managed portfolio consists of sovereign debt in all its forms, while external portfolios include corporate debt as well.

He argues that the question of hard currency or local does not really come into the analysis at the top-most level since once you have undertaken macro­economic analysis on a country, it applies to both the hard currency and the local debt markets. At the next level, it is the non-sovereign corporate debt where a different type of analysis needs to be undertaken which is very sector specific. And even here, he sees hard currency and local currency debt as just different aspects of the same credit risk.

External managers

The external manager line-up with a total of $3.5bn (€2.5bn) under external management reflects both the objective of diversification across sub-asset classes within EMD, but also an objective to diversify across manager styles. In addition, Mn Services acquired the PME pension fund as a client - PME itself now has an equity stake in Mn Services - and along with it, gained an extra four external EMD fund managers alongside the four it already had. While historically Mn has used a number of different benchmarks, it now uses a blended benchmark of the JP Morgan hard and local currency indices, with the ratio dependent on client preference. PME has a 50:50 ratio while PMT has 75% hard currency, 25% local for its benchmark.

Saif divides the managers into four different styles: The typical style is a mixture of hard and local currency, both sovereign and corporate, with a team of four or five managers managing the portfolio. An alternative to this is a fund management firm with three or four independent fund managers running separate unconnected portfolios with clients gaining exposure to a mixture of them decided upon by the manager.

Another style is a completely ­bottom-up approach adopted by a manager with an excellent track record, according to Saif, whose process is unlike anything else he has seen as it does not look at sovereign risk at all, but only on the relative valuations of individual hard currency bonds. Two other managers have a diametrically opposed strategy to this with a very limited exposure to hard currency bonds, but focusing on illiquid local currency corporate debt that may not even be listed.

Hard currency versus local

In a completely unconstrained world, Saif would have a 50:50 split between hard currency and local currency debt. This figure would probably raise eyebrows among many fund managers, who have been reducing their exposure to local currency debt over the last few months in response to inflationary pressures, falling commodity prices and the rising dollar.

Saif has a more positive view of long-term inflation, arguing that there is a good possibility that the inflationary pressures in the global environment are easing as global growth contracts sharply, alongside a fall in commodity prices.

Although there has been an ­inflationary environment for 18 months to two years, many of the world’s central banks have reacted vigorously and the danger that exists relates to incipient ­second-order effects which, if they were to become major, would lead to an uncontrollable and dangerous scenario. “However, given the speed with which commodity prices have come off, second-order effects may not be an issue so that by the second quarter next year, inflation may not be such an issue,” comments Saif.

Mn’s approach to EMD is certainly one of the most sophisticated among European institutional pension funds and its allocation to EMD among the largest. Pelser emphasises that Mn is currently only serving the Dutch ­marketplace, but it will be interesting to see how well its approach to EMD will be received once Mn gains clients outside the Netherlands.

Mn Services

Mn Services acts as a fiduciary manager in the Netherlands and provides pension administration, management support and asset management services for its institutional clients. It has responsibility for administering the pensions of more than 1.1m people, with €65bn of assets under management, split among 18 clients ranging in size from a few million euros to €33bn. As well as the large industry pension funds for metalworkers that are also its owners , Pensioenfonds Metaal & Techniek (PMT) and Bedrijfstakpensioenfonds voor de Metalektro (PME), its clients currently include the SCA Pensionfunds (2008), the Wheel and Tyre fund (2008), the Merchant Navy fund (2008), Cerestar (2007), Nutreco (2007), Forbo, Cargill and Yarden.

As a result, it is also a substantial fund manager in its own right, using a mixture of in-house and external managers to cover the full range of mainstream and alternative global asset classes. It has also recently set up an office in London with the stated intention of bringing the fiduciary management concept to the UK.