KEMPEN INSIGHT /// OCTOBER 2019
Outlook 2020
Is a global recession on the way?
Global Impact Pool Social impact and return
Dynamic sector
Investments in infrastructure
CONTENTS
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Outlook 2020 – Short term /// A challenging investment climate
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Macro Outlook 2020 /// Central scenario
Investment case: Global Small-cap Fund
/// Grey silverfish challenge insurance company
25
22 Developments in the world of pensions /// Fiduciary management
PHOTO COVER Abstract Aerial Art by Phenster
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KEMPEN INSIGHT, OCTOBER 2019
Interest rates to remain low Every Autumn we look ahead and present you our Macro Outlook. Each year, we study a number of topics that could affect the economy and the financial markets. At the moment we can conclude that free trade is being
The best of both worlds /// Review of the first Global Impact Day
squeezed, geopolitical relations are strained and inflation
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is refusing to climb, forcing central banks to implement measures once again. This is having an impact on economic growth, which is currently slowing. Interest rates will remain low over the next few years, and while this is bad news for savers it does help investors: because low
Media to inspire
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/// ‘Shaping the future’
interest rates mean less pressure on valuations. Our Outlook for the longer term in summary: interest rates will remain low for the next few years, while uncertainty will remain high on the financial markets. Our detailed analysis also examines alternative scenarios. In addition to the
Field levelling
/// Integrating listed and non-listed real estate investment
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Outlook, this edition of Kempen Insight is packed with news about our funds and our fiduciary management arm. Our colleague Wilse Graveland describes the shift –‘from management to advice’ – within fiduciary management,
A flying start
for instance. You can read how a tiny creature
/// Fund managers discuss infrastructure
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like the silverfish can cause uncertainty in the insurance industry, and we offer inspiration and insight into our new infrastructure fund. We also look back on our first
Crystal ball
/// Column by Roelof Salomons
Global Impact Day organised by the
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Kempen Global Impact Pool team. I wish you happy reading and look forward to hearing your
/// COLOFON October 2019 © Kempen Capital Management N.V. Art direction/design Henrike Beukema/Dieke Hameeteman Images ANP Photo, Bram Belloni, Depositphotos, EyeEM, Freepik.com, Hollandse Hoogte, Shutterstock Text Marius Bakker, Anke Bos, Joost van Leenders, Jos Leijen, Daniëlle Levendig, Stephanie Lewis, Roelof Salomons, Lesa Sawahata, Karel Zwaan Editorial address Kempen Capital Management N.V. to: Secretariaat Kempen P.O. Box 75666 1070 AR Amsterdam The Netherlands marcom@kempen.nl
Editorial board Lars Dijkstra, Ivo Kuiper, Charlotte Wilberts Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.
opinions. Lars Dijkstra CIO Kempen lars.dijkstra@kempen.nl
Any references in this magazine to ‘Kempen’ are taken to mean Kempen Capital Management N.V. KEMPEN INSIGHT, OCTOBER 2019
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Short term
Outlook 2020:
The answer to this central question that is preoccupying investors all round the world will have an impact on central bank policies, earnings trends and an investment climate that is fundamentally different from today. The negative yield curve in the US is one of the most common indicators for recession, meaning that yields on ten year government bonds are now lower than those on three month bonds, but this is not the only signal we are looking out for.
Is the global Global economic slowdown
There is no question that the global economy is slowing. This can be seen not just from the decline in manufacturing confidence, but also in the lower production levels in industry in many countries, a substantial dip in global trade and a contracting economy in Germany in the second quarter of 2019. China has also seen a drop in the pace of growth in lending by banks, industrial production and retail sales. The negative yield curve in the US is an important leading indicator of a recession and often a component of broader composite leading indicators, such as those published by the OECD. There are few countries in which the OECD leading indicator is still rising and this is evidence of weak momentum in the global economy. Yet the US yield curve is not infallible. Since the 1950s, there have been two recessions without the yield becoming negative. There are also two instances in which the yield curve was negative without it leading to a recession. Nevertheless, the 1960s saw a huge slowdown in growth in the US and in the late 1990s the Asia crisis, the collapse of enormous hedge fund LTCM and the Russian rouble crisis caused severe turbulence on the financial markets. The signal in that negative yield curve is clear. So why shouldn’t we trust blindly in it? Firstly, because interest rates are low. On all the occasions on which this signal proved to be correct, the US central bank was in the midst of a series of interest rate hikes. The real official interest rate in the US is just 0.6 percent at the moment and the Fed is cutting interest rates. The low long-term interest rates are also caused by a structurally high demand for long-term government bonds. The signal of a negative yield curve works even worse outside the US. And figures on service sectors and job markets sketch a less sombre picture. What is the cause of a recession? Traditionally, we look for rising inflation and interest rate hikes by central banks, very rapid increases in corporate investment and debt, or a sharp upturn in the
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Joost van Leenders
oil price. In a recession, these lead to less corporate investment,
Senior Investment Strategist
higher unemployment and lower consumer spending. We have not
joost.vanleenders@kempen.com
seen any of these indicators yet. Inflation is low and central banks
KEMPEN INSIGHT, OCTOBER 2019
/// text JOOST VAN LEENDERS
economy heading for a recession? are putting in implement expansionary monetary measures. There are
is slowing to such an extent that it will be difficult for businesses to
high levels of debt generally, but compared to the global economy
generate earnings growth. This would be a setback for the equity
this has in fact fallen over the past few years. Moreover, lower inter-
markets, given that analysts are still forecasting solid earnings
est rates mean that the global economy can cope with a higher level
growth at the end of 2019 and in early 2020. The trade war does not
of debt. Nor is there overinvestment in our opinion. However, the neg-
look as if it will be resolved quickly either.
ative impact of the trade war between the US and China is becoming
Equities also contain advantages, however, such as attractive divi-
increasingly visible. Earlier, we mentioned weak global trade and
dend yields. Yet some caution is due here. Within equities for the time
industry, but there are signs that this weakness is spreading to corpo-
being we still prefer the US, where the economy is doing better and
rate investment and job markets. All in all, there are still several
there is greater capacity for an expansionary monetary policy. At the
question marks against a global recession.
moment we are mainly seeking refuge in safe corporate bonds in
Will central banks deliver?
Europe and emerging market debt listed in US dollars. These continue to offer attractive yields. Yet for now our allocation policy is
And what about central banks? The extremely stimulatory monetary
geared more to capital protection than attempting to earn high
policies were gradually scaled back over the course of 2017 and 2018.
returns.
The US Federal Reserve has switched from a bond-buying programme
What could reverse this? A deal in the ongoing trade war would of
to reducing its balance sheet and was raising interest rates up until
course clear the air. A more expansionary monetary policy combined
December 2018. The ECB has terminated its bond-buying programme
with fiscal stimulation would also be positive for risky asset classes.
and the Japanese central bank has been buying up a much smaller
There is talk of fresh tax cuts in the US, but it remains to be seen
amount than its own target figure for some time. The reversal in
whether a compromise will be reached between the Republicans and
central bank policy in 2017 and 2018 was perhaps such that the global
Democrats before the presidential elections in November 2020.
economy is still being adversely affected by it. Central banks reverted
Germany and the Netherlands are also considering additional gov-
fully to expansionary policies in the first half of 2019, but there are
ernment investment programmes, and these are an increasingly
other major uncertainties as well. Take the trade war between the US
attractive proposition in view of the negative bond yields. However,
and China, Brexit or political and budgetary problems in Italy. A great
Germany has given itself little constitutional leeway and a previous
deal is now expected of central banks and the question is whether
programme barely got off the ground in the Netherlands. It’s certainly
they will live up to those expectations. In the US in particular the tight
worth keeping a close eye on the stimulatory monetary and fiscal
job market and slightly higher inflation could restrict the central
policies, but for the time being we believe that the negative effects of
bank’s scope for policy-making. As for the ECB, the question remains
the trade war and a potential earnings recession will prevail. ď Ž
as to whether it will have any effect if the bank resumes buying government bonds when German 10-year yields already stand at -0.7 percent and their Dutch counterparts at -0.5 percent.
2020: a challenging investment climate
Whether there is a global recession or not, we anticipate a challenging investment climate in 2020. We believe that the global economy
Disclaimer: the outlook given here is our outlook as of September 2019 and is subject to change without prior notice.
KEMPEN INSIGHT, OCTOBER 2019
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Central scenario 6
KEMPEN INSIGHT, OCTOBER 2019
/// text ROELOF SALOMONS, JOOST VAN LEENDERS photos ANP
MACRO OUTLOOK 2020
Free trade is being squeezed, geopolitical relations are strained and inflation refuses to climb, forcing central banks to implement further measures. This is the basic state of play as of the middle of 2019. Each summer, Kempen re-examines its long-term forecasts. We analyse all the relevant data again, search for positive surprises and identify potential risks. Our conclusion this summer was that the differences compared to a year ago are not so much to be found in the numbers as in the nuances.
Each year, we study a number of themes that could potentially have a major impact on the economy and the financial markets. The common thread running through all these is that the causes and solutions almost always lead us back to policymakers. Central banks and governments occupy the principal roles in all our scenarios.
KEMPEN INSIGHT, OCTOBER 2019
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Growth forecasts are low, as is investment due to the high level of uncertainty about the future
Populism and deglobalisation
In 2018 we discussed the rise of populism and deglobalisation. If there is one thing that stands out this year, it’s that politics continues to dominate the economy and the financial markets. The political centre is increasingly fragmented. There is a smaller chance of maintaining the status quo and this causes uncertainty on the markets. The greatest threat is the current trade war. What started out as a trade dispute, aimed at plugging the gap in the US balance of trade, is esca-
Trends
Populism and deglobalisation Capitalism for the people Techno-optimism
lating into a wider battle about technology and ultimately the global balance of power. In our central scenario for 2020 we expect trade disputes to keep flaring up periodically and there to be more barriers to free trade. It’s probably a bit dramatic to talk of a new cold war, but the similarities cannot be ignored. A further escalation in trade wars remains our main risk scenario.
Capitalism for the people
Calls for more and in particular different measures to boost the economy are becoming ever louder. It’s clear that unconventional monetary policies have failed to trigger widespread economic growth. Inflation targets remain out of reach and inequality has increased. The clamour for a different type of policy is growing, especially from the middle classes. Kempen describes this as Capitalism for the people. Use of terms
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KEMPEN INSIGHT, OCTOBER 2019
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such as Modern Monetary Theory (MMT) and the People’s QE or Green New Deal is now commonplace. They are all variations on the same theme: greater government stimulus and less of a focus on budget defi-
Growth and interest rates will remain low
cits. In other words, old Keynesian theory given a new look. More
The reality is that the main input variables for potential growth, growth
expansionary monetary and fiscal policies in the long term are a given
in the working population and productivity growth remain small. The
for us. If governments really do apply their budgetary policies less
nuance can be found in the response from policymakers. In spite of the
strictly, as is the case in the most likely alternative scenario, interest
trend away from globalisation towards regionalisation, prices continue
rates and inflation will both finally start to rise.
to be squeezed. Longer periods of low growth in the wake of a financial crisis and deep recession are not unusual. Yet it is now over a decade
Techno-optimism
since the crisis and the uncertainty persists. Luckily, we are seeing that companies are again daring to borrow. Unfortunately, this debt is not
The impact of new technologies can be seen all around us, except in
being used for additional investment in the economy. In short, there is
productivity figures. An upturn in growth and inflation generated by
little inflation in the real economy but some inflation in the financial
higher productivity, i.e. techno-optimism, would seem to be a more
economy. The money generated earlier continues to be pumped
distant prospect. Competition and investment are the driving forces
around the financial economy and is mainly causing low interest rates
behind productivity growth. Growth forecasts are low, as is investment
and pushing up the prices of financial securities.
due to the high level of uncertainty about the future. Competitiveness
Something odd is happening with capital market interest rates: these
plays a role as well: businesses simply have no need to innovate. The
have lagged behind nominal economic growth for years. This is bad
winner-takes-all dynamics enable companies to consolidate their
news for savers and good news for borrowers. And completely in line
current dominant positions easily. The question is whether the free
with what Reinhart and Rogoff [2011] called financial repression.
market always works as it should and how dynamics can be restored.
Kempen also sees no reason why interest rates should exceed growth
Perhaps there is a role here for governments to act as a kind of market
for the time being. On the one hand this is due to the (excessive) levels
manager.
of private savings (businesses and consumers) that are finding their
KEMPEN INSIGHT, OCTOBER 2019
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Expected return
Expected vs. required return 10.0% 8.0%
EM Equities EU Listed Real Estate EU Equities
6.0% , 4.0%
US Equities
0.0% 0.0%
Euro High Yield GBP IG credits
US Treasuries
2.0% EMU Bonds
Cash EUR 1.0%
2.0%
3.0%
Euro IG credits UK Gilts 4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Required return Source: Kempen Capital Management, September 2019.
way to the financial market, as well as the tighter regulations govern-
much further. This means that central banks will again have to resort
ing pension funds, insurers and banks. On the other hand you have the
to quantitative easing when the next downturn occurs. Yet this weapon
supply side in which governments (with the exception of the US) are
has become very blunt and we have grave doubts as to whether it
still using their budgetary leeway to a limited extent. The upshot is a
would be able to provide the required boost to growth. Ultimately, it
small supply of new bonds, while a large number of bonds are still held
will be up to politicians to pursue more expansionary budgetary poli-
on the balance sheets of central banks. High demand and low supply,
cies. These would eventually result in the long-awaited reversal in
and few signs of this balance changing.
interest and inflation rates. Let’s not get ahead of ourselves though. A great deal needs to be done before more expansionary budgetary pol-
We expect interest rates to remain below nominal growth over the next
icies can be pursued. Especially in Europe, where budgetary discipline
few years. Low interest rates are bad news for savers, but do help
remains a sensitive subject.
investors. This is because low interest rates mean less pressure on valuations.
Unconventional policy
Climate policy
For investors, ten years is a long investment horizon. Yet a decade is the blink of an eye in terms of climate change. We do not anticipate our
There is no escaping the fact that an upturn in the business cycle is
living environment being so materially affected by climate change over
followed by a more sluggish period. The present business cycle has
the next ten years that it will have an impact on our expected return.
now lasted for an exceptionally long time, but we have yet to identify
Yet if nothing is done, the consequences are incalculable. Calls for a
any major problems. The economy is not overheating, nor are there
decisive climate policy are becoming ever stronger, and more meas-
excesses on the financial markets. Growth is slowing and uncertainty
ures will have to be implemented in the next ten years. What these
increasing, however. There is little leeway for policymakers to provide
measures will be depends on many factors and remains very uncertain.
stimulation in the event of a downturn; negative interest rates are a
If governments actively decide to make the economy more sustainable,
largely ineffective weapon. Interest rates consequently cannot fall
this could lead to higher government spending. This means investment
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KEMPEN INSIGHT, OCTOBER 2019
and in turn higher growth and inflation. A carbon tax could also be an option. Companies are taxed on the burden they place on society and in doing so contribute to combating climate change. The need to restrict our impact on the climate is clear, the question is who pays. In our central scenario, we assume that the economic effect of more investment on the one hand and higher taxation on the other will have a minor impact on the expected return.
Joost van Leenders Senior Investment Strategist
Realistic returns
joost.vanleenders@kempen.nl
If we combine our growth, inflation and interest rate forecasts with current valuations, the outcome is moderate returns over the next decade. When we assume lower interest rates for longer, we are less negative about government bonds and more optimistic about equities. ď Ž
Roelof Salomons Chief Strategist at Kempen and Professor of Investment Theory & Asset Management at the University of Groningen roelof.salomons@kempen.nl
KEMPEN INSIGHT, OCTOBER 2019
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THE BEST OF BOTH WORLDS KEMPEN INSIGHT, OCTOBER 2019
/// text JOS LEIJEN photo ANP
A competitive return and a positive social impact: it really is possible. And Kempen does it. In 2017, Kempen set up the Global Impact Pool with this goal in mind. Investors and managers of the Global Impact Pool got together in Amsterdam to review the fund’s first year on 6 June 2019. The story of WorldRemit and its founder Ismail Ahmed reads like a film script. In 1988, he fled to the UK from Somalia as a refugee. He found himself a job and sent the money he didn’t need back to his family in his homeland. That didn’t just cost him a lot of time going to the agency that arranged the money transfer. The agency also charged him a fee of over 10 percent. We’re not talking about a marginal market here. The transfer of money from rich countries to poor ones constitutes a major source of income for families in those countries. It involves billions of US dollars, more than the sum of all the money spent on development cooperation. There must be a smarter way, Achmed thought.
According to Marjoleine van der Peet, senior
He learned all he could about the international money transfer market and mulled
portfolio manager of the fund, LeapFrog was
over ideas for using modern technology to make transfers simpler, faster and
one of the first investors to attract the atten-
cheaper.
tion of the Global Impact Pool. In its first year,
In the meantime, Ahmed had gone to work at the United Nations. Yet, when he
the Global Impact Pool invested in five funds,
exposed corruption, it cost him his job. He instituted legal proceedings and in com-
including LeapFrog. An important criterion in
pensation for unfair treatment received a payout of US$200,000. He used this to set
selecting funds is their contribution to the
up WorldRemit in 2010, a service for international money transactions via mobile
United Nation’s Sustainable Development
phones. Customers pay a fee of 2 to 3 percent of the amount they transfer. That’s a
Goals (SDGs). The emphasis lies chiefly on the
lot less than the 10 percent or higher charged at traditional money transfer agencies.
SDGs relating to good health and well-being;
Great example
water; energy & climate; decent working conditions and food & the circular economy.
‘WorldRemit is a great example of how financial and social return can go hand-in-
In 2018, the Global Impact Pool invested a
hand,’ Nick Moon, a partner at LeapFrog Investments, says. Moon was invited to
total of €68 million in 45 countries. That trans-
the first Impact Day held by Van Lanschot and Kempen on 6 June. Ismail Ahmed
lates into the sustainable cultivation of nearly
was also supposed to attend but was forced to cancel due to illness. LeapFrog
200,000 hectares of agricultural land, the
Investments invests in companies in Africa and Asia that explicitly aim to have a
generation of 28,000 MWh of clean energy
social impact. It focuses mainly on financial services and healthcare.
and the prevention of 11,000 tons of CO 2 emis-
LeapFrog is a trendsetting impact investor. The Global Impact Pool has invested
sions. Thanks to these investments, 700,000
some of its assets via this investor, which was set up ten years ago. ‘Our founder,
people now have access to improved health-
Andy Kuper, was working on an irrigation project in India,’ Moon explains. ‘Partici-
care and the quality of life of nearly 145,000
pating farmers had a 90 percent chance of success. Yet very few were willing to
small business owners and farmers has been
participate. That 10 percent chance of failure was too big a risk. A failed harvest
enhanced.
would plunge them straight back into poverty.’
KEMPEN INSIGHT, OCTOBER 2019
13
Kuper realised that an insurance policy would persuade farmers to participate and considerably improve their quality of life. Financial services such as insurance were very underdeveloped in India at that time. Kuper recognised the enormous potential for supporting people with low incomes and at the same time helping
Have your cake and eat it
them to be a commercial success. With that aim in mind, he set up LeapFrog Invest-
‘Investment always has an impact on society,’
ments together with a few others. The goal: to invest in companies which seek to
says Karl Guha, CEO at Van Lanschot Kempen.
earn a ‘profit with a purpose’.
‘We want to create a better world for our children and grandchildren. That’s why we examine the social return on all our investments.’ Initiatives such as LeapFrog Investments and the
Solid track record
This year, LeapFrog launched its third investment fund, the Emerging Consumer
other funds in which the Global Impact Pool
Fund III. The idea was to raise US$600 million, but in fact the figure reached
invests have helped to demonstrate that a com-
US$700 million. ‘We have built up a solid track record of financial return and
petitive financial return can go hand-in-hand
impact over the past ten years,’ Moon explains the interest from the market. ‘At the
with a social return and an improved quality of
same time, we are seeing institutional investors and family offices examining the
life. ‘You can have your cake and eat it too,’
social impact of their investments more carefully.’
Guha confirms. The best of both worlds really is
LeapFrog chiefly invests in companies in the financial services and healthcare
possible.
sectors. ‘We select companies that mainly reach consumers with incomes of $US2 to 10 a day,’ Moon clarifies. ‘There is huge potential for growth here. For us it’s crucial that companies genuinely want to have a social impact. In this respect, we look at aspects such as good governance and the strength of the company’s management, but also at the quality of the products or services and consumer protection.’
What do consumers think?
LeapFrog has developed its own system to support its investment decisions: FIIRM. The abbreviation stands for Financial, Impact, Innovation and Risk Management. An important aspect in determining the impact is consumer insights. In other words, what do consumers think? LeapFrog has a special team that researches this. For
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Goodlife Pharmacy is a chain of pharmacies in
instance, it discovered that 90 percent of Goodlife Pharmacy customers (see box)
Eastern Africa. The pharmacies mean that
pay for their medicines in cash. That meant no money, no medicine. Partly at the
medical facilities and medicines are accessi-
initiative of LeapFrog, an insurance policy was created and a system for paying by
ble and affordable for hundreds of thousands
smartphone.
of people. This is of vital importance to people
LeapFrog also assesses whether it will be easy to sell the holding in the company in
in the region. The United Nations estimates
the long term, e.g. to a strategic investor. That of course also yields a return for the
that 100,000 people die every year from fake
pool. Over the past ten years, LeapFrog has sold eleven participations. One example
and ineffective medicines.
is the shares in insurance company BIMA, which was founded in 2010. LeapFrog
LeapFrog invested US $22 million in the
became involved in the company in 2013 and supported its growth process. In 2017,
company in 2016. One year on from the invest-
LeapFrog sold its share to Allianz X, part of the Swiss Allianz Group.
ment, Goodlife Pharmacy had become the
‘BIMA was highly innovative and sold insurance policies via mobile phones,’ Moon
largest pharmacy brand in Eastern Africa. The
says. ‘In the space of six years, the company sold 30 million policies in fourteen
number of locations had doubled to 38. The
countries in Africa, Asia and South America. That was partly thanks to close coop-
goal is for Goodlife Pharmacy to grow further
eration with mobile phone providers. The insurance policies offer protection and
to 100 stores and to serve over 5.5 million
security to millions of families with low incomes. Three-quarters of the policyhold-
people in 2021.
ers were previously uninsured. That just shows the enormous impact of BIMA.’
KEMPEN INSIGHT, OCTOBER 2019
Media to inspire Karel Zwaan is marketing director at Kempen. Focusing on 'shaping the future', he shares his favourite books and podcast.
Legions of the walking dead
Everyone wants change, but few people are willing to change. The book Deep Change – Discovering the Leader Within by Robert Quinn was written for those who do dare to take the plunge and want to think bigger. According to the author, humans are at a crossroads and need to make a fundamental decision: either change or become one of the ‘legions of the walking dead’. Quinn believes that the only strategy that leads to life is deep change. Translate dissatisfaction into action, gather your courage and seek ways to revitalise
Work like a commando
your own life and your job. Don’t resign yourself to anything less, but change based on a vision of your own future and that of the world. Quinn’s approach is without compromise and occasionally verges on the unacceptable. In his book, the author draws parallels with change at organisations that are capable of
It’s not easy to give yourself a kick up
becoming what they always wanted to be using the same rigorous method of
the backside, but reading Extreme
trial and error.
ownership will feel like one for most
Title: Deep change Author: Robert Quinn ISBN: 13: 9780787902445
people. In the book, Jocko Willink and Leif Babib present the U.S. Navy SEALs as an example of how professionals can work. The two men – themselves ex-SEALs –
Hardcore History
saw combat in many parts of the world. Their war stories are central to the twelve chapters. By adopting ‘extreme ownership’, each time they succeeded in surviving under bizarre circumstan-
Anyone who had a good history teacher at school
ces. Each chapter contains a different incredible story and a new
will occasionally yearn for those wonderful stories
lesson for everyday life. The book’s basic premise is simple: when under stress it’s human to
that take you back in time. Hardcore History is the ideal podcast for such
blame others for hectic situations and failed projects. In contrast,
people, although many reviews note that podcast isn’t really an accurate
Extreme Ownership teaches us that everything that happens in
description. The show’s host, Dan Carlin, practically writes an entire audio
your life is 100 percent your responsibility. If you cannot do any-
book for each episode.
thing about the situation, then it is 100 percent your responsibility
The best thing about the medium of podcasts is the intensity with which
how you deal with it. Adherents to the principles in the book will
sounds and a narrator can create a world inside the listener’s head. In
never again send an email and wait patiently for an answer, or
that sense alone, the intros to the podcasts are brilliant: we hear a series
leave a voicemail and wait to be phoned back. The continual
of radio reports on historical events. Carlin is unmatched in the way he
question is ‘have I done everything I can?’ and if the answer is
brings the most varied historical events to life: the Mongol empire, the
yes, ask yourself what else you can do.
Eastern Front, the Spartans or the fall of the Empire of Japan. There are now 63 shows available online. The most recent dates are
The book was high on the New York Times Bestseller list. A
from January 2019. The enormous length of the broadcasts (four or even
preview of the book can be viewed via the inspiring TED talk
five hours) means it can take months for Carlin to publish a new episode.
by Jocko Willink on YouTube.
Yet the wait is more than worth it.
https://tedxuniversityofnevada.org/speakers/jocko-willink/ Title: Extreme Ownership Author: Jocko Willink en Leif Babin ISDN: 13: 9781250067050
Podcast Title: Hardcore History Author: Dan Carlin www.dancarlin.com
KEMPEN INSIGHT, OCTOBER 2019
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Levelling the Field HOW KEMPEN INTEGRATES LISTED AND NON-LISTED REAL ESTATE INVESTMENT The professionally managed real estate universe consists of listed companies and non-listed funds. One of the biggest challenges of investing in real estate that is part of listed companies or unlisted funds is the perception that one compares ‘apples to oranges’. How does Kempen level out these differences? We spoke with Todor Ristov portfolio manager real estate to see how Kempen is integrating listed and non-listed real estate and driving value for clients.
Todor, how do you combine the analysis of listed and non-listed real estate investments?
key characteristics we are able to identify
transparency. For example on the listed struc-
nuances between the assets irrespective of
ture you are obliged to provide information to all
their legal structure.
investors and it is publicly available. However,
Both listed and non-listed real estate ulti-
non-listed funds disclose information only to the
What are the difference between ‘listed’ and ‘non-listed’?
investors in the fund. When analysing them we
estate. The distinction between them often is just the legal wrapper of the real estate portfo-
You can transact listed real estate shares daily.
ments, not only the fund we are invested in.
lios, however the underlying investment in
That means that investors can see how much
At Kempen we have a strong network through
these structures consists of physical buildings
the market values the investment. However
which we can access knowledge about those
that can be part of both listed or non-listed
non-listed funds are open only to professional
non-listed funds, and we are also active in many
structures. Often listed companies trade assets
buyers and sellers and prices are based on
industry initiatives. For example INREV (Euro-
with non-listed funds and vice versa.
quarterly appraisal values. This pricing differ-
pean Association for Investors in Non-Listed Real
As a result, we see that the value drivers of real
ence means that comparing listed and non-
Estate) facilitates transparency and uniform data
estate are the quality of physical location, the
listed real estate is not a straightforward
distribution on the non-listed side. This improves
property itself, and the quality of the tenant
process.
transparency of non-listed funds and makes the
mately represent investment in physical real
occupying the building. By identifying these
16
KEMPEN INSIGHT, OCTOBER 2019
want full transparency of all possible invest-
integration of listed and non-listed possible.
What are the challenges in approaching real estate investing in this way?
A logical combinationt?
For listed instruments one can obtain exposure
Usually the industry sees listed and non-listed
instantly on the stock exchange, whereas non-
real estate investments as two separate asset
listed investments trade quarterly in private
classes and separates them in terms of invest-
non-homogeneous structures, and therefore
ment analysis. We at Kempen see that what
the time to get exposure to such real estate is
ultimately drives value for our clients is:
longer. This difference in speed of execution
-
the quality of the underlying real estate,
poses implementation challenges when listed
-
the management team that operates the assets,
and non-listed are integrated together. In addi-
-
how the structure is financed and
tion, the two structures have different levels of
-
how the structure is governed.
/// text LESA SAWAHATA image JORIS FISELIER
Listed Real Estate
Non-Listed Real Estate
Kempen’s integrated Real Estate approach
Value = trade value • ca. 325 companies
Value = trade value • ca. 250 funds
• ca. 200.000 objects
• ca. 100.000 objects
• Universum: US$ 2,6 tn*
• Universum: US$ 7,1 tn*
• Liquidity
• Limited Liquidity
• High volatility
• Low volatility
• Worldwide
• Worldwide
• Different sectors
• Different sectors
Data analysis makes all objects, companies and funds worldwide comparable
Trade value deviates from praised value objects
Value based on most recent praised value objects
Tailer made solution for individual client requests * Source: EPRA Monthly Statistical Bulletin Dec 2015, MSCI 2016. This infographic is for information purposes only and provides insufficient information fora n investment decision. Kempen Capital Management N.V. (Kempen) is licensed as a manager of AIF’s and UCITS and to provide investment services and is subject to supervision by the Autoriteit Financiële Markten (AFM). Amsterdam, October 2017.
This is ultimately the same for both listed and
investment approach of applying data allows us
identify quality characteristics unique to the
non-listed real estate structures and thus it
to have an unbiased forward-looking long-term
underlying real estate, and to trade on those
makes perfect sense to integrate them.
view on the market, and we are able to select
differences. This creates an integrated
The challenge of difference in valuation meth-
the best real estate investment for our clients.
approach suitable for some of our clients.
odology discussed earlier, related to the
Real estate is a market that inherently lacks
implementation, can also pose an opportunity
Integrated approach
transparency. By applying the same data
to create value. If you have a forward-looking
As we found in the white paper Listed and non-
approach to both listed and non-listed real
view you can generate added value for your
listed real estate investment: why combine the
estate investments, we are able to increase our
clients by efficient allocation over listed and
two?, as the investment horizon lengthens, cor-
insights in the real estate market and improve
non-listed alternatives as prices of the two can
relation between the equity market and listed
our decision making. This way we are able to
differ substantially.
real estate decreases, whilst the correlation of
avoid personal biases and to objectify the
The industry values real estate on comparable
listed and non-listed real estate increases. In
investment decision.
transactions that occurred in the recent past
our team we apply the same investment frame-
and therefore they are backward-looking. Our
work to the two structures and we are able to
KEMPEN INSIGHT, OCTOBER 2019
17
A flying
infrastructure fund The Kempen (Lux) Global Listed Infrastructure Fund was launched at the start of this year. The fund invests in listed infrastructure companies. Fund managers Thomas van der Meij and Jags Walia can look back with satisfaction on the first six months: the fund outperformed its benchmark by 261 basis points (gross return for costs). ‘We shouldn’t celebrate too soon, but we seem to be doing things right.’
Jags Walia on a site visit in Hong Kong. September 2019.
18
KEMPEN INSIGHT, OCTOBER 2019
/// text JOS LEIJEN photos EYEEM / JAGS WALIA
start
for the
‘We seem to be doing things right’
Infrastructure ensures that the world func-
demand for data centres, communication
tions. Ships unload their cargo in ports. Lorries
towers and satellites. With a view to sustaina-
transfer the cargo to its destination by road.
bility, we’re increasingly moving towards
Recipients are notified that their orders are on
renewables to generate electricity. Some
their way via data networks. Communication
countries are using nuclear energy to manage
equipment is powered by electricity gener-
CO2 emissions. Globalisation demands new
ated by wind and solar farms.
methods of transport; the hyperloop might just
Dynamic sector
be put to use one day.
‘You create infrastructure to last decades,’
High barriers
Thomas van der Meij says. ‘Yet the sector is
‘Infrastructure has a number of specific charac-
highly dynamic. All kinds of things are chang-
teristics that make it an interesting investment,’
ing. Major trends that affect infrastructure
Jags Walia continues. ‘It often involves compa-
include urbanisation, globalisation, digitisa-
nies with a monopoly that have concessions
tion and sustainability. These trends are
lasting decades. The entry barriers are high.
changing the requirements infrastructure
Few new players manage to enter the market.
needs to meet.’
Moreover, equities in these companies are much
For instance, digitisation has led to greater
less volatile than those in other companies.’
KEMPEN INSIGHT, OCTOBER 2019
19
/// text XXXXX XXXXX photo XXX XXXXXXXXXXX
‘These are companies with a long-term view,’
far,’ Walia says. ‘The equities then become
Van der Meij adds. ‘They have predictable
cheaper than their fundamental valuations.
cashflows and their income is usually infla-
That’s the best time to invest or to increase
tion-proof. They have hedged that risk in their
holdings, if you believe the equity price will
contracts by ensuring that their rates can rise
recover at a later date. That’s what happened
in line with inflation.’
with France’s Vinci and Japan’s Kansai Electric
If you look at the index, performance of listed
Power Company.’ (See boxes)
infrastructure companies evolves steadily and
When analysing companies, the fund manag-
is less affected by economic cycles. The
ers can profit from the expertise that Kempen
benchmark, the FTSE Core Global Infrastruc-
has accrued over the past few years. ‘Our
ture 50/50, has risen by an average of
modus operandi is data-driven,’ Van der Meij
6 percent above US inflation each year since
explains. ‘Out of about 500 eligible compa-
2008. ‘There is a positive risk/return ratio,’
nies, we analyse approximately 200 in detail.
Van der Meij confirms. ‘We have calculated
In doing so, we examine all the available
with a mean-variance tension test that portfo-
information on the company. With respect to
lio returns could have been 2.5 to 3.5 percent-
value, but also less tangible aspects, such as
age points higher per year if listed infrastruc-
the quality of the management. We subse-
ture was added to an investment portfolio.’
quently select 20 to 40 companies for our
Tactical return
20
KEMPEN INSIGHT, OCTOBER 2019
portfolio.’ ESG criteria (environmental, social & govern-
Tactical return can also be earned on top of
ance) criteria naturally weigh heavily in the
structural return. ‘Investors’ over-reactions to
selection process. ‘This applies to all of Kem-
news can sometimes cause prices to drop too
pen’s investments and therefore also to our
YELLOW VESTS Among other activities, Vinci is a major toll road operator in France. At the end of 2018, the company faced blockades by the ‘yellow vests’ protesting against President Macron’s government policies. Investors saw the company’s income fall as motorists avoided the toll roads. They sold their equities and the price of Vinci dropped substantially. ‘In fundamental terms there was nothing wrong with the company,’ Thomas van der Meij says. ‘The blockades were merely a hiccup in operations over decades. For us, this was the right time to invest. The yellow vest protests are now pretty well over and the equity price has recovered completely, in fact it’s higher than before the protests.’
BETTER SAFE THAN SORRY fund. As an example, we are considering
This approach certainly seems to work. Over
investing in a company at the moment. We
the first six months of 2019, the fund posted a
In April this year, Kansai Electric Power
have discussed ESG issues in detail with the
return of 20.8 percent, while the return on the
Company announced that its new nuclear
management, but are awaiting evidence of
FTSE Global Core Infrastructure 50/50 index
power plant was to enter into operation
progress before we proceed further. We have
stood at 18.2 percent. ‘We’ve only just started,’
a year later than planned. More time is
also been in touch with Greenpeace, for
Van der Meij puts this in perspective, ‘but the
needed to comply with safety require-
instance, so that we can analyse specific
initial results are great. Now we need to con-
ments. This prompted investors to sell
issues from all angles and in doing so obtain
centrate on holding on to those over the next
their equities en masse. The price plum-
a complete picture.’
few years and building a solid track record.’
meted by nearly 8 percent in a single
According to the fund managers, the Kempen
day and as much as 20 percent overall.
Excluding macro-risks
(Lux) Global Listed Infrastructure Fund could
‘In the long term, it makes little diffe-
The Kempen (Lux) Global Listed Infrastructure
be an excellent addition to the portfolios of
rence that the power plant will generate
Fund invests in a ‘cluster neutral’ manner
long-term investors. Of course investors
electricity a year later,’ Jags Walia
versus its benchmark. This means that the
should consider if this fund will eventually fit
claims. ‘You could reason that the delay
weight in the portfolio of e.g. investments in
their portfolio. It offers a sound return versus
is positive if it yields a safer power plant
the US is the same size as that of the bench-
the risk and the equities are less vulnerable
that will suffer fewer disruptions to
mark. ‘This is how we exclude macro-risks,’
than other equities. ‘Equity prices fell by an
power supplies in future. To us, this news
Walia says. ‘Within those geographical
average of five percent in May on trade war
was a reason to buy more equities rather
markets we then seek the best stocks using
concerns,’ Walia says, ‘while our fund climbed
than to flee.’
our valuation models.’
by 0.5 percent in the same period.’
DISCLAIMER THIS ARTICLE WAS WRITTEN IN JULY 2019 Kempen (Lux) Global Listed Infrastructure Fund (the “Sub-fund”) is a Sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. Kempen is authorised as management company and regulated by The Netherlands Authority for the Financial Markets. The Sub-Fund is registered under the license of the Fund at The Netherlands Authority for the Financial Markets. The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document and the prospectus. These documents as well as annual report, semi-annual report and the articles of incorporation of the Fund are available free of charge at the registered office of the Fund located at 6H, route de Trèves, L-2633 Senningerberg, Luxembourg and on the website of Kempen (https://www.kempen.com/en/asset-management). The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
KEMPEN INSIGHT, OCTOBER 2019
21
Investment case
Protector Last year, Protector, an insurance company in the Scandinavian market, was challenged by a small insect. The eventful appearance of the grey silverfish provided an attractive entry point for long-term value investors.
In July 2018 the Kempen (Lux) Global Small-cap Fund bought their first position in Protector Forsikring, a Norwegian insurance company. Pro-
Share price under pressure in 2018
In H1 2018 Protector’s earnings were under pressure due to an
tector is a challenger to bigger insurance companies in Norway,
increased level of claims, partly due to poor weather. The company
Sweden, Denmark, Finland and the UK, resulting in strong growth in
acknowledged that it had to raise its insurance prices. These higher
insurance premiums, driven by its low cost infrastructure and high cus-
insurance premiums would drive earnings recovery, despite short-term
tomer satisfaction ratings from insurance brokers. This entrepreneurial
earnings weakness. We bought our initial position in July at NOK 52.000
company has grown insurance premiums by 25 percent per annum in
per share, after the stock had dropped more than 40% in 2018.
the past 10 years. The company has a strong track record on insurance
Unfortunately, in Q3 the company faced an even bigger challenge. The
profits (underwriting margin) and strong investment results (6 percent
company sells insurance policies that cover claims from buyers of
average returns on its investment portfolio in the past ten years). The
property (‘change of ownership’ product). In a very short period claims
share price performance also reflected the strong growth and opera-
on the so-called grey silverfish insects rose sharply from 20 claims in
tional performance up until the start of 2018.
2016 to 38 in 2017 and a total of 208 in the first three quarters of 2018.
Banks, insurance companies and small-caps Financials – banks and insurance companies – represent approximately 10 percent of the small-cap investment space. While financials are sometimes IMPORTANT this text demonstrates how we analyse individual companies. This document was compiled by the fund managers of the Kempen (Lux) Global Small-cap Fund (‘the fund’), managed by Kempen Capital Management N.V. (‘Kempen’). Please also see the declaration and disclaimer at the end of this text. Date of writing May 29, 2019.
22
KEMPEN INSIGHT, OCTOBER 2019
avoided by investors, as they are considered more complex, we believe small-cap financials are a fruitful sector for stock picking. Though certainly financials can be rather complex businesses, small-cap financials typically are more focused. Management teams tend to be more closely involved in the core niche business. Moreover, the level of disclosure of the activities
/// text JAN WILLEM BERGHUIS photo SHUTTERSTOCK / 2D-SIGN
25% growth 10 years in a row
Strong competitive position maintained entering 2019 4,286 3,612
×× Cost leader in the world ×× Quality leader in all markts ×× Net CR 91.9% in recent years
companies are a valuable
2,916
addition to our small-cap
2,318 1,865
32
77
2004
2005
245 2006
Norway
368
466
2007
2008
Sweden
603
679
803
2009
2010
2011
1,091
2012
Denmark
UK
1,410
2013
‘Banks and insurance
portfolio’ 2014
2015
2016
2017
2018
Finland
Source: www.protectorforsikring.no
Like in many other European countries, such as the Netherlands, the
the appearance of the vermin grey silverfish in their policies and even-
insect grew rather aggressively in Norway in just a few years. Buyers
tually decided to discontinue the ‘change of ownership’ product. The
of houses claimed the appearance of the insect decreased the value of
company was now made up of two parts: the discontinued change of
their property. As a consequence, the company had to increase
ownership business which had a sizeable book value, but was not gen-
reserves again in Q3, leading to another disappointment in October
erating profits and a growing business that were expected to return to
2018. At this point, when the share price had declined more than
normal profitability in 2019 and beyond. The sum of these two parts
50 percent in 2018, we believed Protector’s valuation had become
was worth significantly more than market cap at that time.
even more attractive from a long-term perspective.
The challenger is ready to challenge again
While we believed the valuation was attractive, the risk would still be that the claims for grey silverfish would be higher than the company
We had several calls with the company and in October we visited the
had reserved for. In recent months it became clear that Protector won
analyst day in Norway. The company at that point stopped covering
several legal cases against policy holders, who claimed the value of
is more detailed in general. In some cases, even the impact of large single-insurance claims and individual loans are specified, making it easier to assess risks. We believe this makes small-caps easier to analyse than bigger banks and insurance companies. Examples in our portfolio are American Equity Life (pure player in retirement savings policies in North America), SpareBank 1 SR-Bank (Norwegian regional bank), RenaissanceRe (niche leader in property catasrophe re-insurance), Beazley (specialty insurance with leading position in cybersecurity).
KEMPEN INSIGHT, OCTOBER 2019
23
Kempen (Lux) Global Small-cap Fund celebrates
5
years anniversary their property declined. This provides confidence that this book of business is properly reserved for on an adequate basis. Protector is optimistic on growth opportunities and profit
This July the Kempen (Lux) Global Small-cap Fund has reached a five-year track record. Besides, the fund has grown to a size of more than €500 million.
improvement ahead. The company targets 14 percent growth and 4 percent underwriting margin for 2019. In subsequent years the
Jan Willem Berghuis
company aims to grow premiums by 10-15 percent with a
Head of the Small-Cap team: ‘Our
6 percent underwriting margin. We believe Protector clearly was
team consists of enthusiastic fund
challenged in 2018, but the insurer is now able to challenge its
managers who have an enormous
competitors again.
drive to deliver a good performance and to select the best companies. It's great to see that we can share this passion with an ever-increasing group of investors in our fund. In July 2014 we started the fund with €6 million assets under management and since the start our performance has been good: the average annual return of the fund over this period of time is 12.1 percent compared to 9.8 percent for the MSCI Small Cap Index *.’ *
Average annual performance after costs of the Kempen Global Small-cap Fund (I-class) from the start on 8 July 2014 to the end of June 2019. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
DISCLAIMER Kempen (Lux) Global Small-cap Fund (the “Sub-Fund”) is a sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. KCM is authorised as management company and regulated by The Netherlands Authority for the Financial Markets. Paying agent and representative in Switzerland is RBC Investor Services Bank S.A., Bleicherweg 7, CH-8027 Zurich, Switzerland. The Sub-Fund is registered with The Netherlands Authority for the Financial Markets under the license of the Fund. The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document and the prospectus. These documents as well as annual report, semi-annual report and the articles of incorporation of the Fund are available free of charge at the registered office of the Fund located at 6H, route de Trèves, L-2633 Senningerberg, Luxembourg, at the offices of the representative in Switzerland and on the website of KCM (www.kempen.com/investmentfunds). The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
24
KEMPEN INSIGHT, OCTOBER 2019
/// text ANKE BOS photo EYEEM / DEPOSIT
Lessons from the past mean a more professional future
INTERVIEW Wilse Graveland, director institutional fiduciary management in the Netherlands
‘The consolidation taking place across the pensions landscape can be both friend and foe. Friend, because De Nederlandsche Bank is insisting that Dutch pension funds draw up their own policies and make their organisations more professional. We support this fully and are happy to help them in this. Yet it’s also our foe because it applies to an ever smaller number of pension funds,” Wilse Graveland, director institutional fiduciary management, begins, in response to being asked how the job of fiduciary managers has changed over the past few years in the Netherlands.’ ‘Clients can be divided into three groups. Firstly, you have the consolidating pension funds: their growing size means there’s a larger budget and, as a result, greater capacity to become more professional. The upshot is an enormous increase in requirements, including those that the pension funds demand of their fiduciary manager. The second group are the pension funds that are considering joining a general pension fund (algemeen pensioenfonds or APF, see for more information the text box about a Dutch APF), usually schemes with up to a billion euros in assets under management. Although I firmly believe in APFs as an important vehicle for the future, the sector is still experiencing difficulties. For instance, when it comes to administering hybrid pension schemes, switching from a contribution-based scheme to a benefit-based scheme is not possible for everyone and highly complex. In addition, APFs are still too small to arrange that in
Client group
one clean process. Finally, some schemes are still operating inde-
The consolidating pension funds
Client group Pension funds considering joining a general pension fund
Client group Pension funds operating independently KEMPEN INSIGHT, OCTOBER 2019
25
pendently. They are increasingly realising that this independence
pointing results from active managers, the use of in-house investment
means they need a party to advise them. It’s impossible for them to
products and a considerable increase in complexity. One conse-
do everything themselves or to reinvent the wheel.’
quence of this is that the adage ‘from management to advice’ applies
What is a pension fund’s overall purpose?
to all the phases of the service. Wilse: ‘Pension funds are now forced to set out how the manager selection process works, the policies on
These three groups of pension funds have an important task in
use of liquidity and derivatives, and to consider their ESG policy and
common, Wilse says: ‘Each pension fund is forced to consider its indi-
evaluation process. We are increasingly asked to write or review
vidual identity; what associations do members have with their
policy. It’s up to the fund itself to determine what kind of policy they
pension fund and what solutions does it want to offer? It’s important
want to represent them. Such changes also have consequences for
that pension funds themselves think carefully about what they stand
ALM advisors. They are now analysing more frequently than before,
for and lay this down in their mission and policies. Fiduciary manag-
and the pension funds themselves need to provide more input. That
ers used to have a great deal of discretion here. We really took away
initially means more work, but on the other hand it greatly improves
what in hindsight was too much of the burden from our clients and
decision-making!’
not enough was recorded and underpinned. Fiduciary managers can decision-making to presenting choices to the board. The pension fund
Manager selection based on the pension fund’s basic principles
boards are back at the helm.’
In practice, this means that a fiduciary manager has to present all the
still take on the entire service chain, but our role has shifted from
From management to advice Asset managers haven’t always got it right. Examples include disap-
options to the client for decision-making. Wilse: ‘Per asset class we always discuss a minimum of two manager options that we have tested in advance against the client’s basic policy principles. So the
How do our clients view the changes to fiduciary management? FRANCIS VAN BERGENHENEGOUWEN
Director administrative office of Het nederlandse pensioenfonds:
MARION VERHEUL
Independent advisor to Pensioenfonds voor het Slagersbedrijf:
'The arrangements and processes agreed
'Sixteen years ago, I often wrote the
with the fiduciary manager need to ensure
investment plans and other policy docu-
that the board is presented with relevant
ments. Most asset managers were more
proposals for decision-making at the appro-
focused on management at that time. Now
priate time. My experience is that Kempen
my role is much more one of countervailing
has succeeded in creating a successful working relationship with
power and monitoring: making sure that all the parties do what
Het nederlandse pensioenfonds, one in which everyone knows and
they need to and that nothing is overlooked. I think this is a posi-
assumes their individual responsibilities.
tive development on balance, but it’s difficult to decide at which
I agree that what we aspire to and do needs to be recognisable for
point ‘relieving the fund of the burden of management’ goes too
members and needs to match their specific requirements. As we
far and the board ends up too far removed from its own policy
were able to design Het nederlandse pensioenfonds from scratch,
documents. Kempen has made this transition very successfully,
we have already thought long and hard about our identity. And it
perhaps partly because it didn’t have the baggage of an old-style
meant we could create a professional organisation with a futu-
implementation organisation that traditionally concentrated
re-proof structure from the start.'
chiefly on management.’
26
KEMPEN INSIGHT, OCTOBER 2019
board’s preferences have already been taken into account in those
insights about the pensions system in general, sustainability, specific
options. Under MiFiD II, we are now obliged to show the client the
asset classes and implementation options. Our aim in doing this is to
entire selection process, including all the rejected options. We are
demonstrate our added value to our clients, and at Kempen we do
seeing two main changes in portfolio content: a broader package of
this via an annual service provision report. We start by conducting a
illiquid investments, while in the case of liquid investments a respon-
self-evaluation, but also hold detailed discussions with the scheme
sible ‘passive, unless’ policy is often the starting point. The latter
on the impact achieved, innovation, fees and investment return.’
also has a downside. As everything is institutionalised and decisions are even made about
Greater professionalism and the future
benchmarks, this increases volatility enormously. If things go wrong,
The new professionalism in pension fund boards and investment com-
they go badly wrong. Many funds aim to mimic benchmarks, often
mittees is also a source of inspiration for other sectors. Kempen
leading to large sums of money being invested in the same place.
serves a wide range of medium-sized and large pension funds. The
This is the consequence of this model: detailed decisions lead to
experience gained here yields best practices that can be used for more
extra governance or high fees due to active management. Luckily,
than just pension fund clients. Other sectors such as insurers, B2B2C
benchmarks are now being examined more critically and marginal
platforms and family offices can also profit from these experiences.
phenomena tackled.’
Examples include disciplined decision-making and evaluation in the
The added value of fiduciary management
context of the relevant sector, as well as more institutional investment options.
‘It’s our clients who decide what added value we bring,' Wilse says. ‘The model we use means that we aim mainly for innovation. Many pension funds ask pertinent questions, and we want to discuss new
MORE INFORMATION ABOUT APF The general pension fund, in Dutch algemeen pensioenfonds or APF, a relatively new pensions vehicle in the Netherlands, was launched in 2016. It is set-up to serve as a low-cost alternative for funds that want to keep the identity they would otherwise lose if they were to opt for liquidation or to insure their liabilities. An APF typically allows for different pension schemes to operate under a single board and include different risk and asset pools. The concept is a response to consolidation in the pensions sector, and allows funds to benefit from increased scale.
KEMPEN INSIGHT, OCTOBER 2019
27
Crystal ball Sometimes, when you say you are both an economist and an investor, you can get rather bemused questions. Do you try to make predictions? Surely that isn’t possible? Do you have a crystal ball or something? Let me try and put an end to such questions once and for all.
when I started out. The crux lies in how often
to fear losing out on profits and sell stocks
you can use this skill. The comparison to a
too soon. At the other end of the spectrum
casino speaks volumes. In a casino, the
you have hope, i.e. the hope that the losing
‘house’ has little skill but does have a huge
positions will bounce back. We hold on to
advantage: it can spin the roulette wheel fre-
that hope for too long.
The answer is no, I don’t have a crystal ball.
such process to our advantage by means of
Financial markets and economic trends are
analysis. Do we possess better or more
indeed difficult to predict. When I attempt to
background information? Can we analyse it
explain my profession to students, clients or
better? And can we then implement these
others, I always include two key learnings:
findings better? In one or a combination of
first, you can try to get it right slightly more
these points lies the difference from a fully
often than average. Second, you need to
efficient market; this difference generates a
limit the losses if you are wrong. It’s gener-
hit ratio that is slightly above 50 percent.
quently. I don’t have a crystal ball, but I do have a Our industry is no different. As an investor,
couple of suggestions for further reading. If
you need to identify your skill and seek
you fancy taking the time to read more about
ways to apply it as often as possible. There
this, you should try searching online for the
is no crystal ball involved. I prefer to
‘fundamental law of active management’
compare it to a random process, in which our
and the ‘Kelly criterion’. You’ve just read the
job is to influence the probable outcome of
briefest possible summary of these here.
ally one or the other: only the best among us can do both.
We aren’t done yet though: if you’ve got it right, it’s great if it also yields a return. And if
28
Let me start with probability distribution. We
you can succeed in limiting the losses if
all know that the market is random. One of
you’re wrong. We can scale positions such
the most irritating common comparisons is
that winning positions yield more return than
the one involving dart-throwing chimpan-
the losing positions cost us. You will recog-
zees. That’s also random. Investors ought to
nise an old market maxim here: cut your
Roelof Salomons
do it better: what is their hit ratio? Is it higher
losers and let your winners run. That’s easier
Chief Strategist at Kempen and Professor
than 50 percent? That’s good, they possess
said than done. Academics always bring up
of Investment Theory & Asset Management
skill. It really doesn’t need to be 60 percent.
the disposition effect here. This is the psy-
at the University of Groningen
That was one of the first lessons I learned
chological problem that we have a tendency
roelof.salomons@kempen.nl
KEMPEN INSIGHT, OCTOBER 2019
/// image FREEPIK
KEMPEN INSIGHT, OCTOBER 2019
29