Page 1


Outlook 2018

The economic cycle is persisting Tangible growth via

real assets

British economist

John Kay: ‘Focus on stewardship’


What is hindering our productivity growth?


7 Macro Outlook 2018 6 /// The economic cycle is persisting, interest rates are rising

Inflation /// The enemy of UK pension funds?

‘Humans will have to step up their game to compete with the robo-advisor’ /// Interview with British Professor John Kay

Real assets /// Investment in forestry, infrastructure and windmills


4 14

12 /// The ‘making of’ our cover photo, on the roof of the Kempen Amsterdam office.

Cover image: Rob van der Voort 2


Change your habits, create value /// Books that inspire by Floris Oliemans

A meeting of minds at London Guildhall /// Kempen Investment Seminar

Goldilocks or trade war? /// Alternative scenarios 


Turning views into value Turning views into value: that is what we stand for at Kempen. We might create value by being instrumental in a client, colleague or company coming up with a new idea or by helping to solve a tricky problem. Happily, we are


often given the opportunity to observe that our clients value our opinions, as was the case recently following a customer satisfaction survey which demonstrated that we receive a Net Promoter Score of 44 percent. That’s a high percentage, especially for the financial sector, and we are


proud of it while of course being aware that we can always do better. Where the financial sector as a whole still has room for improvement is explained by the doyen of economics himself, Professor John Kay, who will also

Private equity /// Cases from the Dutch healthcare sector


be a guest speaker at our Outlook seminar in November. He shares his views on stewardship or servant leadership and how we ought to look at our day-to-work in a different light.



/// Positive about equities

New Kempen high yield fund /// ‘Focus on quality is essential’

beyond: I am certainly no clairvoyant, but we dare to predict here that a number of interest rate hikes will be


implemented in the US. Joost van Leenders explains the repercussions for asset allocation. We also examine a couple of interesting asset classes in more detail in this issue: real assets (trees, land, roads and buildings),

Column by Roelof Salomons /// How will the mix of growth, inflation and monetary policy pan out?

In our Outlook we start by looking forward to 2018 and

private equity and high yield.


From the UK we are given insight into hedging inflation risk and why this is so important for British pension funds. In September London Guildhall was the location for a lively panel discussion on long-term investing. We enjoy


facilitating this: after all, the opinions of our clients are

November 2017 © Kempen Capital Management N.V.

Art direction/design Henrike Beukema/Dieke Hameeteman

Editorial address Kempen Capital Management N.V. to: Secretariaat P.O. Box 75666 1070 AR Amsterdam The Netherlands T 31 (0)20 348 8700

Contributors Images: Philip Jenster, Getty, Mario Hooglander, Tim Matthews, Johannes Abeling, Rob van der Voort Tekst: Jos Leijen, Daniëlle Levendig, Stephanie Lewis, Anouk Suwout

Editorial board Ruth van de Belt, Lars Dijkstra, Anja Corbijn van Willenswaard, Charlotte Wilberts

Kempen Capital Management N.V. (Kempen) 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 (AFM) and De Nederlandsche Bank (DNB). This information should not be construed as an offer and does not provide sufficient basis for an investment decision.

Any references in this magazine to ‘Kempen’ are taken to mean Kempen Capital Management N.V.

what matter most. We look forward to hearing your opinions as well, for instance on this magazine, via the address given below.

Lars Dijkstra CIO Kempen KEMPEN OUTLOOK, NOVEMBER 2017


John Kay In the lead-up to his lecture at Kempen’s Amsterdam headquarters, the editors of Insight had the privilege of asking Professor John Kay how he thinks the financial industry should really be functioning. ‘It is through promoting long-term prosperity for all that good returns are earned’




‘Both individuals and firms feel trapped’ In the past several years you have published

Both individuals and firms currently feel

Can you talk about the differences and/or

two acclaimed books: Other People’s Money,

trapped in a dysfunctional system which is

similarities between the UK finance sector

in which you outline an outdated, over-

not serving the needs either of customers or

and that of the Netherlands?

grown, internally-focused financial industry

companies. What we need to do is to effect a

‘I don’t profess any expertise, but my under-

detached from ordinary business and every-

cultural change by altering the way in which

standing is that in many ways the Dutch system

day life; and [the 2016 2nd edition of] The

both customers and regulators view the

is more like the British system than those of

Long and the Short of It in which you explain

sector – one that understands that it is

other large EU countries. Of course, the history

‘how to put your finances in the only hands

through promoting long-term prosperity for

of commercial relationships between the British

you can confidently trust – your own.’

all that good returns are earned for savers.’

and the Dutch – and as a Scot I recognise the

Thus you describe a global financial environ-

special relationship between the Scots and the

ment that is not just complex but greedy,

Purpose has been defined as ‘the difference

Dutch – goes back a very long way. More

untrustworthy and self-interested. In this type

you are striving to make in the world’.* What

recently, the Netherlands has given a large role,

of environment how does a mindset of stew-

difference should the finance industry –

like the UK, to funded defined benefit schemes,

ardship or servant leadership gain traction?

which invests ‘other people’s money’ – be

a system which comes under pressure from the

‘On the positive side, my experience is that

focusing on creating in the world?

current interest rate environment.’

most individuals and many firms involved in

‘The purpose of asset management is not to

asset management would like to be doing a

make a lot of money for people who are

You have defined four essential functions of

rather different job. One that involves a

employed in asset management and their


closer relationship with, and understanding

firms; it is to direct funds to where they will be

1 to operate a payment system;

of, investee companies; and requires trust

most effectively deployed. And to enable indi-

2 for capital allocation;

rather than transactional relationships with

viduals, firms and asset management to make

3 for wealth management;

their clients.

a lot of money by doing this job well.’

4 and for risk mitigation.

WHAT ARE YOU READING? ‘Andrew Lo’s Adaptive Markets is the most interesting finance book of the year; Richard Bookstaber’s The End of Theory is also well worth reading. And Nassim Taleb’s forthcoming Skin in the Game will be reliably provocative. I hope those who have not read my own Other People’s Money will rush out to buy a copy. And I always recommend Dick Rumelt’s Good Strategy – Bad Strategy for its coverage of what people in finance should be thinking about – but aren’t.’


By Jim Ware, author of Money, Meaning, and Mindsets: Radical Reform for the Investment Industry (Focus Consulting Group 2017).




What would these four functions look like

2008 not only led to the greatest financial

within a finance sector that would meet the

crisis for decades, but was devoted to manag-

is one of Britain’s leading

needs of the real economy?

ing risks – badly – which had been created

economists, an influential and

‘Let me take these four functions one by one.

within the financial sector itself in the first

consistent voice that bridges

First, the payment system. This is probably the


academia with practice with

area of financial services in which really radical

The risks which matter to ordinary people – of

policy. He is renowned for his

change is most visible, as a result of new tech-

natural catastrophes, illness and mortality, of

ability to express complex

nologies. Our grandchildren will find it extraor-

loss of employment and breakdown of relation-

ideas on the relationships

dinary that we used folding bits of paper to pay

ships – are and will continue to be dealt with

between economics, finance

for cups of coffee, or that we had large trans-

best by combination of private and social insti-

and business in a clear and

action balances sitting in current accounts. Ulti-


succinct way. An Oxford Fellow

and social implications. It is already the case

Kempen launched its FCLT-related newsroom,

at LBS, Oxford and LSE. He

that the main uses of cash in the modern, to help accelerate discussion

economy are in doubtfully legal activities.

and more importantly action towards the shift

Second, wealth management. Technology is

to ‘the long horizon’ in finance and invest-

going to make a lot of difference here as well.

ment. What do you think about this initiative?

I think the robo-advisor will have a large role.

‘The way we bring about the changes we need

The computer is honest, does not need to be

is by changing culture and expectations. We

paid, and leaves a clear trail of why it gave the

need to explain this to people again and again.

advice it did. And it can help people take

As Keynes wrote almost a century ago, it is the

control of their own affairs. Human advisors

power of ideas which matters in the long run,

will have to step up their game to compete.

even to practical men who ‘proclaimed them-

Third, capital allocation. Large companies –

selves exempt from any intellectual influence.’

those of a size likely to be listed – no longer

I therefore strongly support the Kempen initia-

rely on external capital. The need for expertise


mately these changes will have wide economic

and capital allocation today is in the twin acti­ vities of search and stewardship – search for those new business opportunities which will become the large companies of tomorrow; stewardship of existing assets and corporations. This requires very different skills from the stock picking abilities traditionally required of the asset manager. And fourth, risk management. I think it is ironic that the risk management which the financial sector prided itself on in the 30 years before



since 1970, John has held chairs wrote for the Financial Times for more than 20 years, earning the Senior Wincott Award for Financial Journalism in 2011 for his FT columns. His acclaimed books include The Long and the Short of It (2009) and Obliquity (2011). His most recent book, Other People’s Money (2015), was chosen as book of the year by The Economist, FT, and Bloomberg and was shortlisted for the Orwell Prize for Political Writing.

2018 Macro Outlook

Reason for optimism Investor sentiment has improved sharply compared to last year.

Expansionary phases often end as a result of the actions of central

Several general elections have been held in Europe but they fizzled

banks, due to the end of the credit cycle or a combination of the two.

out without a bang, and although President Trump regularly causes

Although the overcapacity in the US economy is decreasing rapidly,

brief periods of volatility on the equity markets his America First

inflationary pressure remains low. We expect inflation to pick up,

policy has so far borne little fruit. Moreover, we have seen a spurt in

partly due to higher wage growth, but this is happening so slowly

global economic growth.

that the Fed (the US system of central banks) will not have to slam on

The US expansionary phase has already lasted for the past eight

the brakes just yet.

years and we are unlikely to see the end of the cycle next year.

At Kempen, we believe that the Fed will gradually start to reduce the



The Shanghai World Financial Center

Although the acceleration in growth is now behind us, investment strategist Ruth van de Belt expects the global economy to continue to grow over the coming year. For many central banks, the time has come to move away gradually from expansionary policies.

size of its balance sheet and implement two to three interest rate hikes

the fall, such as strong exports (caused by the weak pound) and

next year. These are considerably more interest rate increases than the

robust external demand, a temporary halt to budgetary tightening

financial markets are currently pricing in. In spite of the predicted interest

and an expansionary monetary policy.

rate increases, we expect policy interest rates to remain lower than the neutral interest rate: the interest rate level which neither stimulates nor curbs the economy. In our view, the credit cycle is unlikely to come to an end next year, although credit quality will deteriorate slightly more.

Asia hitches a ride on China’s growth

Economic growth is likely to persist in Japan. The country is profiting

Fears of deflation dissipated in eurozone

from the upturn in global trade and domestic spending is also contributing more. Although the economy is growing at above trend, the inflation target of 2 percent will remain out of reach for the time being. The

The eurozone economy is performing increasingly well. Growth is up

Japanese central bank is expected to pursue the most expansionary

sharply and more and more countries are contributing to this growth.

monetary policy of all the major banks next year as well.

Consumers and manufactures therefore have every reason to be optimis-

Growth is slowing very gradually in China. The government is orches-

tic. Inflation also remains low in the eurozone. Given the overcapacity in

trating a soft landing by alternating between stimulatory and tight-

the economy and the appreciation of the euro, we anticipate that this will

ening measures. We are not worried about a hard landing triggered

remain the case.

by the debt crisis. Although the amount of debt continues to grow, the

President Trump’s America First policy has so far borne little fruit.

Yet we do expect the European Central Bank to move away gradually

vast majority is financed in China. Domestic savings levels are high

from its expansionary policies. Not only are the limits imposed on the

and capital markets underdeveloped, leading to savings chiefly

purchasing programmes coming ever closer, fears of deflation have also

being held in the shape of deposits. The liquidity will also remain in

dissipated. The purchasing programmes will be scaled back to zero over

China due to capital controls. The government’s far-reaching control

the next year. However, an initial interest rate increase is unlikely. The

of the financial sector and major debtors (state companies) implies

credit cycle will not yet come to an end thanks to the extremely low

that debt restructuring can occur gradually. The rest of Asia (exclud-

policy interest rates.

ing Japan) is hitching a ride on the back of Chinese and global growth. Moreover, inflation is under control, enabling central banks

UK groaning under Brexit

to introduce monetary stimulation if necessary. Emerging markets are also succeeding in profiting from this. 

The outlook for the UK is less positive. As a result of the vote in favour of Brexit, we foresee a sharp slowdown in growth. Brexit is expected to curb consumer spending and investment. The high inflation will restrict pur-

Ruth van de Belt

chasing power, while companies may delay investments due to the high

Investment Strategist

level of uncertainty. At the same time, there are factors that will soften




Ageing population versus immigration policy

Is the balance between expected risk and expected return still as good as it can be? Potential growth and inflation expectations are very important to expected returns. The former has not changed in 2017, while we have adjusted inflation expectations for Asia downwards: at Kempen we re-examine our strategic asset allocation each year.



An ever smaller portion of the population is in the productive phase of their lives The growth in labour productivity and the

to structural factors. In the West,

actual labour supply are the main influenc-

productivity growth is being hin-

ing factors in our estimate of potential

dered by increasingly difficulties

growth. The potential for growth is the

in raising the workforce’s average

same as it was last year. In the West,

level of education any higher.

growth of the actual labour supply is being

Reforms and regulation of the

restricted by the lower numbers of young

financial sector are also playing a

people joining the workforce and by the

part here. This has adversely

ageing population. An ever smaller portion

affected the ability of banks to

of the population is in the productive phase

issue loans.

of their lives. There is even shrinkage in

There is still room to raise the

Japan and the eurozone.

level of education in emerging

The fact that the actual labour supply in

markets, but productivity growth

the US and UK is still growing slightly is

is lower than it was a few decades

chiefly due to immigration. Although (part

ago. The productivity gap with the

of) the population in both countries has

West is also closing.

voted in favour of restricting immigration, we believe it is too soon to adjust our forecasts. Over the past few months, new US President Donald Trump has faced major hurdles in

Uncertainty in Japan

Compared to last year, there is greater uncertainty about inflation

implementing his hard-line immigration policies. It remains to be seen

expectations in Japan. In spite of an extremely expansionary monetary

how much of the UK’s wish to curb immigration will be intact in the

policy, Japanese inflation and inflation expectations remain low. Yet

wake of the divorce negotiations with the European Union.

the Japanese central bank is convinced that inflation expectations will

Asia ex Japan and emerging markets are still experiencing growth in

become embedded around the inflation target of 2 percent. As a result,

the labour supply. Although ageing populations will start to play a

there is now a lower risk of additional monetary measures.

greater role in Asia ex Japan, emerging markets will be much less

The downward adjustment for Asia ex

affected by this.

Japan is chiefly due to the persisting low inflationary pressure coming out

Higher level of education?

of China and South Korea. This has

cyclical recovery has finally brought an end to the many years of

two countries to adjust their infla-

decline. Nevertheless, productivity growth is likely to remain low due

tion targets downwards. 


% 4 31⁄2



1⁄2 0

United States

United Kingdom

Euro area

Real potential growth



-1⁄4 -3⁄4%

1-2% 1⁄4 -11⁄4%




13⁄4 -21⁄4%



13⁄4 -21⁄4%

3 21⁄2


prompted the central banks of the


Our forecasts for labour productivity growth remain unchanged. The



Azia ex Japan

Emerging markets Source: Kempen Date: oktober 2017

Ruth van de Belt Investment Strategist

More value please! Efficient markets, accounting and portfolio theory are all widely taught at university, yet value investing barely gets a mention. This despite the success of many billionaire practitioners including Warren Buffett, Seth Klarman and Michael Price. While this book – Value Investing: From Graham to Buffett and Beyond – does not promise to turn you into a billionaire overnight, it does give you a sound framework to analyse and value companies. The author of the book, Bruce Greenwald is the successor of Benjamin Graham and teaches value investing at the Columbia business school. Within our investment team we widely use the earnings power value model introduced in this book and it is our preferred valuation tool. This book comes highly recommended. Title:

Value Investing - From Graham to Buffett and Beyond


Author: Bruce Greenwald ISBN-13: 978-0471463399

Rewire your brain Exercise more, drink less or simply be nicer to other people are frequent new year’s resolutions that are made and failed to keep. The Power of Habit: Why We Do What We Do in Life and Business discusses how to change both your own (harmful) habits as well as those of your organization. By repeatedly incentivizing wanted behaviour you rewire your brain and the habit becomes ingrained. The book uses many examples such as the visualization habits

Floris Oliemans is Portfolio Manager with

used by Michael Phelps to become the most successful Olympian of all time.

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You might not want to be an Olympian, but you may want to reduce the

ardent reader, we asked him to share which

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books are on his bedside table.

way to achieve that.

You can also follow Floris on Twitter: @FlorisOliemans


The Power of Habit - Why We Do What We Do in Life and Business

Authorr: Charles Duhigg ISBN-13: 9780812981605




THE INFLUENCE OF INFLATION ON UK PENSION SCHEMES A defined benefit pension scheme’s liabilities are

scheme funding) they will typically never reduce

the Brexit referendum last year has pushed

linked to inflation and life expectancy. As these

benefits even if inflation is below 0 percent on an

inflation higher but still someway from the caps

variables increase the amount of money in cash

RPI (Retail Price Index) basis. We recognize here

most schemes have in place. Schemes had

terms that needs to be paid out in the future also

that there has been a ‘trend’ to move the

previously benefited from very low inflation that

increases. Current actuarial practice is then to

measure of inflation for many schemes from RPI

for most of 2015 was below 1.5 percent.

discount these cashflows using a rate dependent

to CPI (Consumer Price Index). Other things being

on gilt yields. As yields fall the net present value

equal, as CPI is typically lower than RPI this has

Increasing prices

of the cashflows increases.

a benefit to the funding status of a scheme.

We have so far concentrated on the impact inflation has on a schemes liabilities, inflation

It is therefore important for sponsors and trustees to have a thorough understanding of the


also impacts a schemes’ assets. Equity valua-

impact inflation can have on a scheme. Even

One of the worst things that can happen to a

tions typically increase as inflation rises. The

small differences in inflation, compounded over

pension fund in terms of solvency is deflation.

cause of inflation is increasing prices, as com-

long periods can cause large differences in total

Deflation, will typically decrease corporate

panies increase prices they can increase earn-

cashflows. If we assume stable inflation to be

earnings, decrease equity prices and decrease

ings and increase dividends thus resulting in

anywhere in the Bank of England (BoE)’s target

gilt yields. However the scheme is unable to

increasing valuations. The relationship is not

range of 1-3 percent this can still cause massive

decrease its liabilities – due to the floor on

perfect, and can break down at very high

changes in the amount of benefits to be paid.

inflationary increases promised to members. By

levels of inflation, but equities, nonetheless,

Outside of these ranges the impact can be more

contrast, very high inflation will have the oppo-

offer some protection against inflation.

complex and somewhat unexpected.

site effect with an increase in company earn-

Conventional government and corporate bonds

A typical schemes’ liabilities do not respond to

ings, equity prices and bond yields – the

however decrease in value as inflation

high or very low inflation in the same way they

scheme however will not suffer a large increase

increases. These instruments pay a fixed

do to moderate inflation. Most schemes set a cap

in liabilities due to the cap on inflation dis-

amount of cash every year and return a fixed

on the extent to which they will protect against

cussed earlier.

amount of capital at maturity. If inflation

inflation. For example, they will not inflate bene-

The inflationary environment at the moment has

increases unexpectedly the value of these

fits by more than 5 percent on an RPI basis. On

not been particularly favorable to pension

cashflows will be reduced and the price of the

the downside however (in terms of impact on

schemes. The fall in sterling we have seen since

bonds will fall to compensate.




As we have alluded to, the impact of inflation

scheme and trustees need to have an under-

on schemes can be severe and volatile infla-

standing of how changes in inflation can impact

tion can cause dramatic changes in funding

their funding position. Whilst the impact of infla-

levels creating uncertainty both for sponsors

tion can have a significant impact on pension

and trustees. The best way to mitigate this

schemes there are ways this can be mitigated,

risk is to have an allocation to investment

notably by allocating to assets whose cashflows

instruments whose cashflows are positively

are directly linked to inflation. 

Kempen UK clients consist of defined benefit pension schemes, the underlying liabilities of which are linked to inflation. Even small differences in inflation, compounded over long periods can cause large differences in total cashflows.

impacted by inflation. Typically this would be

Despite the Bank of England’s inflation target,

index-linked government or corporate bonds. As inflation increases the cash value of

there remains significant uncertainty around infla-

coupons and maturity payments is increased

tion, which can cause massive changes in the

in-line with inflation, thus providing a way of mitigating against the increase in liability

amount of benefits to be paid. So whilst stable

values caused by inflation. Alternatively

inflation may reduce uncertainty, it does not

schemes can use derivatives whose value is also linked to changes in the value of infla-

mean schemes no longer need to be worried

tion. On the other hand alternative asset

about their inflation risks. In addition to that, infla-

classes, such as infrastructure, direct lending

tion also impacts a scheme through its assets,

and real-estate generate inflation-linked cash flows helping schemes to protect against

whether these are inflation-linked or not, by

inflation, so an allocation to these provides at

increasing or decreasing their value. Therefore,

least a partial hedge against inflation.

Mitigate impact In conclusion inflation has a critical impact on both the assets and liabilities of a pension

hedging the inflation risk will continue to be a hot Maya Beyhan Investment Strategist

topic for Kempen UK clients to be able to achieve good funding levels.



/// illustration SHUTTERSTOCK

Growth you can

Real assets are expected to play a key role in the growth of prosperity and the expected growth in the global population. Yet what are real assets, other than an umbrella term for all kinds of concrete, tangible investments that could provide the answer to social and economic challenges? 14


reach out and touch What are real assets? Agricultural land, ports, container ships, warehouses and windmills: this is just a selection from the asset class known as real assets. Yet what are real assets, other than an umbrella term for concrete, tangible investments that could provide the answer to major social and economic challenges? The main characteristics of real assets are: \\\  I ndex-linked assets at a time when money printing presses are working overtime, real assets provide protection against the potential consequences of the current monetary experiment known as quantitative easing; \\\  An identifiable cashflow profile rent, leases and government concessions provide stable, regulated or contracted income; \\\  A real, inflation-linked return concessions and contracts generally include an explicit inflation clause; If you follow the daily news you know that the

There are global concerns about sufficient

new Dutch government has a great deal of

food, housing, social provisions and transport:

\\\  Low correlation to other asset classes

work to do: there is a shortage of starter and

all basic necessities of life. The United Nations *

and even within the asset class itself

retirement homes, rail passengers have to

has calculated that food production needs to

logistics centres are sensitive to the

squeeze themselves into overfull trains and

increase by 70 percent up to 2050 in order to

local economy and vacancy levels,

schools buildings are in poor condition. On a

be able to feed everyone on the planet. In the

agriculture and forestry are sensitive

larger, global scale, we are seeing more prob-

meantime, we are facing soil erosion, water

to the weather, the climate and food

lems caused by an accelerated growth in the

shortages and global warming.

trends, while wind farms (of course)

world’s population, our growth in prosperity,

In order to deal with all this, in Europe we need

depend on the wind.

demographic trends and long-term underin-

to invest â‚Ź 1.5 to â‚Ź 2 trillion in new infrastruc-


ture up to 2020. Only then can we meet revised



sustainability criteria and keep up with techno-

meet customer demand, for instance. In addi-

Our conclusion

logical trends, according to the calculations of

tion to growing crops, these can be adjusted

Real assets are expected to play a key role in

the European Commission**. Many government

and production, transport or marketing can be

the growth of prosperity and the expected

leaders are throwing enormous figures about:

provided. Water or waste-processing compa-

growth of the global population. In order to keep

the European Commission’s 2020 Juncker Plan

nies earn bonuses from quality improvements.

pace to some extent, investment in infrastruc-

involving € 0.5 trillion is a modest version in

Wind farms can increase the span of the tur-

ture, energy, forestry and agriculture will have

comparison. Donald Trump’s $ 1 biljoen infra-

bines and in doing so increase the return.

to increase by a disproportionate amount.

structure plan sounds much more impressive,

Financial optimisation has also been a major

According to a report published by McKinsey***,

not to mention Beijing’s $ 8 trillion One Belt,

driver of return, but in our view no more can be

75 percent of the infrastructure we will have in

One Road initiative to restore the Silk Route

derived from this because of the persisting low

2050 still has to be built. In order to be able to

through central Asia.

interest rates.

meet social criteria, investment is required in new forests, new infrastructure and new agri-

Productivity boost required

Fragmentation creates opportunities

cultural techniques.

Yet these bids for immortality dreamed up by

Consolidation will be an interesting driver of

Pension funds and other investors have been

nationalist politicians will not succeed in effect-

return in future. Ownership of real assets, such

convinced of the advantages of investing in

ing the required transition alone. A productivity

as land and buildings, is often fragmented. This

real assets for the past ten years, or have

boost is needed to meet demand and to make

has traditionally been the case in agriculture.

already profited from sound results during the

infrastructure sustainable. This will take politi-

The Netherlands is leading the way in effi-

last one to five years. Positive drivers of return,

cal will, technology and capital.

ciency, but many of our farmers have reached

such as operational optimisation and consoli-

This capital needs to be put to use efficiently.

retirement age and the next generation is

dation, will continue to play as important a role

Take the food production chain: institutional

leaving the sector as they cannot achieve the

as ever. Yet we believe that the positive feed-

capital could be used to expand agricultural

required increase in scale alone.

back loop from these investments on the main

companies and apply improved irrigation and

We are also seeing fragmentation caused by

economic and social challenges continues to

fertilisation techniques on a larger scale. The

trends in new, sustainable sources of energy,

be underrepresented in investment literature.

resulting larger quantities of food would be

such as biogas, district heating, hydropower

We believe that interest in this investment

transported in bulk by companies using more

and shale gas. The growth in the alternative

theme will only grow. 

modern and more efficient ships. In turn, con-

energy sector and the opportunities for compa-

tractors could build modern ports and new

nies to combine and professionalise infrastruc-

logistics centres in response to the increase in

tural assets, real estate and farms creates

agricultural scale. Offshore wind farms could

opportunities for generating additional return.

be constructed to allow products to be cooled

Major institutional investors that have invested

and retained for longer.

in agricultural land, forestry and infrastructure

We do not include commodities or infla-

for years are happy to acquire these improved,

tion-linked financial instruments in our defini-

combined and consequently larger-scale

tion, only tangible assets with a stable, attrac-

assets and are prepared to pay a premium.

tive and index-linked return.

However, investors do need to realise that

This return may be earned by meeting con-

investment in real assets has a long-term nature.

tracted or regulated obligations. Yet the icing

In some cases, it can take years for cashflows to

on the cake often comprises operational pro-

get going properly. In certain types of agricul-

Richard Jacobs

ductivity improvements and developments. An

ture, plants or trees only reach their production

Co-head private markets

agricultural company can adjust its services to

potential after three to five years.

* ** Investment Plan for Europe: the Juncker Plan, *** Infrastructure productivity: How to save $1 trillion a year by McKinsey,




A meeting of minds In London Guildhall Pension Fund trustees and investors gathered for the Kempen annual Investment Seminar and dinner. There were presentations on various investment topics, followed by a panel discussion on ‘Focusing Capital on the Long Term’ with FCLT GLobal’s CEO Sarah Williamson, Lars Dijkstra, CIO of Kempen, renowned economist and professor John Kay and Stuart Doole, Global Head of New Product Development Index Research, MSCI. The participants provided valuable insights on cultural and regulatory differences in the UK, the Netherlands and the United States. As a finale dinner was served in the crypts: a historic and beautifully decorated location.





‘At Kempen we think corporate

‘I don’t agree that capital

‘People in the financial sector

‘We see an aspirational effect

culture is actually the only

markets are about capital allo-

feel short-term pressure and it

on corporates to do better than

Unique Selling Point for asset

cation. This used to be true.

doesn’t improve their decision

their peers, in order to be


Business isn’t very capital inten-


included in a specific bench-



sive and most of the capital isn’t




owned by the companies.’




Goldilocks OR A

As economic growth and inflation are the most relevant variables for the financial markets, this year we have analysed the following four combinations of growth and inflation: low inflation/high growth, high inflation/high growth, high inflation/low growth and low inflation/low growth.

Low inflation / high growth

High inflation / high growth

In this scenario we assume that intelligent automation, a combination of

In this scenario, we assume that the eurozone will finally implement

artificial intelligence and automation, really takes off. This enables com-

far-reaching institutional and structural reforms. Tackling rigidity on

panies to automate complex, non-routine tasks that require flexibility

labour and product markets will lead to higher potential for growth.

and adaptability. Traditional production factors, such as capital and

Not only will the supply of capital and labour increase, it will also be

labour, can then be put to more efficient use. This increases productivity

possible to use these production factors more efficiently. Higher poten-

growth and leads to higher potential for growth. We do not believe that

tial for growth implies that it will take longer for an economy to reach

intelligent automation will result in mass unemployment. However, the

its production limits and to fuel inflation. Yet inflation will be higher in

negotiating power of employees will decrease, which will restrict wage

this scenario. This is caused by a combination of large-scale govern-

pressure. Moreover, goods and services will become cheaper. Inflation

ment investment and a central bank that stays behind the inflation

will consequently remain low.




Each year at Kempen we draw up a picture of what might happen over the next ten years. Although we have a great deal of confidence in our basic scenario, it is always sensible to look at other potential scenarios as well. To this end, we examine a number of alternative scenarios each year.






High inflation / low growth

Low inflation / low growth

This scenario could occur if, for instance, US President Trump keeps his

In this scenario, we assume a growing global imbalance between savings

election promises. If the US closes its borders to immigrant workers,

and investments. Savings will continue to increase. The growing imbal-

the actual labour supply will barely increase. At the same time, the

ance will cause a further fall in the neutral interest rate, i.e. the real

introduction of trade tariffs will unleash a global trade war. Trade bar-

interest rate that ensures that savings are equal to investments at a

riers will reduce competition. This will not only have an adverse effect

global level. This interest rate will decrease to such a low level that it

on productivity growth (there is less pressure to work more efficiently),

will become impossible for central banks to push down market interest

but also on inflation. After all, non-efficient companies usually apply

rates to the same level. As a result, they will be unable to give the

higher prices than efficient ones, as they also have higher costs. Fur-

economy the boost it needs and in doing so fuel inflation. ď Ž



thermore, central banks will continue to pursue expansionary monetary policies in order to stimulate growth.

Ruth van de Belt Investment Strategist



Home-grown private equity two fine examples According to Sven Smeets, Co-head of private markets, and Edzard Potgieser, Director of private markets, two highlights from the European healthcare sector demonstrate that private equity investments close to home can be financially attractive and contribute to innovation and sustainability.

Kempen Capital Management N.V. (‘Kempen’) currently does not hold shares in the mentioned companies. The views expressed in this document may be subject to change at any given time, without prior notice. Kempen has no obligation to update the contents of this document. As asset manager Kempen may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. The information in this document is solely for your information. This document should not be considered to constitute an investment recommendation and it is not intended as an offer or a solicitation to buy or sell any financial instrument mentioned in this document. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the companies and the views contained herein are entirely those of Kempen.



This article looks at the venture capital market,

acquisition price will only be paid once the

an estimated 600,000 people who suffer from

more specifically the healthcare sector. Along-

company earns a specified minimum result or

some form of sleep apnea, this tool could

side technology, this is the most important

revenue, Ed.]. The story of Dezima Pharma is a

potentially significantly improve the quality of

sector in the venture capital market. Investors

fine example of how a strong combination of

life of a large group of people.

in venture capital in fact contribute directly to

private equity and academic expertise can lead

innovation in their own backyard. This is pre-

to success.

cisely why government bodies such as the UK’s Enterprise Investment Scheme (EIS) and the


Investors go for sustainable

The above examples demonstrate that invest-

Another example of a Dutch venture capital

ment in healthcare can match up well with the

participants in this segment.

investment geared more to medical technology

sustainability criteria increasingly applied by

We are seeing increasingly intensive coopera-

is NightBalance. This company was set up in

investors. After all, the result of such invest-

tion between private investors and universities

2009 out of YES!Delft, the start-up incubator at

ment is immediately visible and in addition to

in the healthcare sector. This enables effective

TU Delft (Dutch university of technology). A

innovation it contributes positively to the length

implementation of the best academic ideas.

number of Dutch venture capitalists later also

and quality of life of a group of patients.

There is a pressing need for innovation: the

joined the company.

Today’s private equity market has a relatively

population in Europe is ageing. Older people

NightBalance focuses on developing a tool for

large amount of available capital, which is

want to live independently for longer and this

people who suffer from sleep apnea. The tech-

increasing competition for investments. This is

requires innovative solutions. This might

nology triggers vibrations when someone who

chiefly taking place at the upper end of the

include curing diseases by developing new

suffers from apnea adopts an incorrect position

market, in large buy-outs. We believe that

drugs, but also medical technology aimed at a

in their sleep (i.e. they start sleeping on their

smaller, more local specialist private equity

better quality of life. Some investments have

back). The signal alerts the person that they

managers with an extensive network currently

the potential to cut healthcare costs, as for

need to return to the correct position. In doing

offer more attractive return prospects. Across

instance they enable people to live in their own

so, people learn to adjust their sleeping posi-

Europe we can identify interesting managers

homes for longer.

tion without affecting their natural sleeping

that have the potential to earn attractive

pattern. As in the Netherlands alone there are

returns in the current market climate. 

European Investment Bank (EIB) are very active

Dezima Pharma

A recent and highly-successful example of Dutch venture capital investment is that of Dezima Pharma. The company was founded in 2012 by Professor John Kastelein, who is attached to the Academic Medical Center in Amsterdam. Together with specialist venture capitalists, Kastelein acquired the rights in Japan to develop a drug that reduces cholesterol. The Japanese company had shelved work on it for an unspecified period. It involves a new generation of cholesterol-reducing drugs, which cuts the risk of heart attacks among people suffering from heart conditions. Following successful drug trials, in 2015 Dezima Pharma was sold to US pharmaceutical company Amgen. The total acquisition price could rise as high as €1.3 billion, although this is dependent on reaching a number of milestones [the remainder of the Sven Smeets

Edzard Potgieser

Co-head private markets

Director private markets



Where should the fixed-income investor go? Are investors still rewarded for taking risks? We think so. But choices have to be made. In last year’s long-term yield expectations, we

much has changed. Aging and low growth in

outlined a moderate image. Due to high valua-

labor productivity keep potential growth low.

tions, yield expectations were low. Stock

This low growth and low inflation will keep a

Joost van Leenders

markets were not affected by this in the past

downward effect on interest rates. But we do

Investment Strategist

year. In local currency, American stocks over

expect the interest rate to rise. That has been

the past twelve months recorded a total return

predicted by many in recent years, so what’s

of more than 15 percent, European stocks 13

different now? First, the global economy has

percent, and emerging markets shares up to 23

grown and in some countries, such as the

percent (after lagging performance in previous

United States, Japan and perhaps China, the

years). Bond yields were a lot less satisfying

capacity limits are within sight. Second, central

due to a slightly raised interest rate on

banks in the United States and the eurozone

balance. Government bond yields were even

will gradually reduce their incentive policies.

slightly negative. Investors who looked for

This can, especially in the short run, cause

more risks were barely rewarded with invest-

upward pressure on interest rates, which

ment-grade corporate bonds, while high-yield-

means that they rise faster than markets expect

ing corporate bonds still showed good returns;

at the moment.

almost 10 percent in the United States and

In the long run, low growth and inflation are

8 percent in the eurozone.*

especially important. Since the starting point of interest rates is now higher than last year, this




means that our expected returns on govern-

Regarding our assumptions, again nothing

zone are slightly more positive than last year.

ment bonds in the United States and the euro-


Expected return

10 8


6 4


2 0










Required return





Source: Kempen Capital Management - 2017

For corporate bonds we foresee marginally

This can be seen in our yield expectations as

offer higher returns than fixed income.

higher returns than last year, due to the slightly

they have increased further. As with bonds,

For company shares we prefer Europe and

more positive image for government bonds.

they are below the level we find reasonable in

emerging markets to the United States. The

Slightly lower interest rate increases in the

the long run. However, we don’t advise inves-

United States are further along in the economic

long term are therefore positive. But taking risk

tors to stay out of stock in the short term. The

cycle and profit margins are higher: this limits

in this investment category is only moderately

expected returns are still higher than on fixed

possibilities for profit growth. On top of that,

rewarded. Our expected returns for high-yield-

income. In our view, the investment climate is

American shares are relatively more expensive

ing corporate bonds are lower than last year.

also not negative for stocks. There is economic

compared to those from the other two regions.

This is because risk premiums have fallen

growth and profit growth and margins can

sharply. There seems to be little room for

further improve in Europe and in emerging


further decline.

markets. Furthermore, interest rates and infla-

Overall, our expected returns are low. For

So where should the fixed-income investor go?

tion remain low in historical terms. So even if

bonds, slightly less than last year, but for

From the perspective of expected return, we

valuations gradually normalize, we expect

stocks even lower. Will investors be rewarded

find structured credit attractive. Structured

profit growth can support a further increase in

for taking risk at all? We think so. To give an

credit has a high credit storage compared to


example: the dividend yield on European

credit quality and a limited interest rate sensi-

Stock exchanges have been rising for a consid-

stocks excluding the United Kingdom is around

tivity. The limited liquidity in this investment

erable amount of time without any significant

3 percent, while German government bonds

category contributes to the risk premium, so

correction. A correction will undoubtedly come

yield at the most 0.5 percent return. Investors

naturally investors must assess whether this

at a certain time, but a long-term underper-

must make choices. We have already men-

fits the objectives of the portfolio.

formance of stocks needs more: a recession,

tioned our preference for structured credit and

downward pressure on profit margins or

equity in Europe and emerging markets. In


excesses in corporate investment or lending.

addition, we find real estate attractively priced.

Over the last twelve months, profit increases

These aren’t things we expect in the short term.

And this investment category offers some pro-

have not been able to track the stock rally.

In the long run, we are looking through such

tection, in case inflation unexpectedly runs

Thus, valuations of stocks have deteriorated.

cycles and expect to see that stocks will also

higher than we’ve anticipated on. 


These are local currency returns on September 22, 2017. Due to the US dollar depreciation against the euro, dollar yields are converted to euros almost 7 percent lower.



/// by JOS LEIJEN visual GETTY

Kempen (Lux) Euro High Yield Fund

‘We focus on risk control’

Fallen and rising The behaviour of traditional investors and rating agencies creates an imbalance in the market for debt securities, especially in the highest segment of the high yield market. Specialists Rik den Hartog and Luuk Cummins tell us about the new Kempen investment fund that focuses on this segment of the credit market.

The expected return on credits is more or less determined by two factors, Den Hartog explains: the interest rate and a spread as a reflection of the creditworthiness of a company. This is known as the credit spread. Rating agencies such as Standard & Poor’s occupy an important position in the credit market as they rate the creditworthiness of companies. To do so, they apply a rating that is split into investment grade (IG), i.e. the most creditworthy companies, and high yield (HY). ‘The new investment fund focuses on credits with a BB rating and subordinated bonds,’ Den Hartog says. ‘This is the highest class within high yield and is close to investment grade. What makes these bonds interesting is the fact that the risk/return ratio is currently very attractive. Companies in this segment enjoy a robust corporate profile combined with high



angels stars yield spreads. This results in a relatively high

There are also companies with a structural BB

Sharpe ratio (extra return for the additional risk) with

rating. As an example, Den Hartog takes packaging

a low downside risk.’

company Ball, a global market leader in the produc-

Fallen angels, rising stars

tion of cans for the beverages sector. ‘At its core it is a sound company that enjoys stable revenue and

Part of the attractiveness of the BB segment lies in

cashflows. It operates with a slightly higher amount

the fact that many investors distinguish rigidly

of debt on its balance sheet as a result of acquisi-

between investment grade and high yield. If a

tions, but in our eyes it is a creditworthy company.’

company is downgraded by the rating agencies from BBB (IG) to BB (HY), they sell these bonds. ‘You can then often buy these so-called fallen angels at

An eye for sustainability

ESG (environment, social and governance) criteria

a good price,’ Cummins explains.

are taken into account when selecting the bonds.

‘In addition there are the bonds of companies that

‘On the one hand this is because we always take

are working hard to earn a higher rating, the rising

these criteria in principle into account, but also

stars. We buy these bonds at a favourable time and

because a poor performance in ESG terms can have

when the company performs better the bonds rise in

an impact on the company’s creditworthiness,’

value. It is the BB segment that profits most from

Cummins continues. ‘If we think something ought to

this. We believe that this segment is inefficiently

be done differently, we seek contact with the

priced and that the value is not always an accurate

company. If we observe little progress, this has con-

reflection of the credit risk.’

sequences for our decision to invest in the company.’

Kempen has a highly-experienced credit team that

The Kempen (Lux) Euro High Yield Fund may appeal

has operated in this market since 2008. ‘We believe

to investors who seek a sound return at a relatively

that our process is especially suited to this segment,’

low level of risk. ‘Investors who already invest in

Den Hartog confirms. In his opinion, this is due to the

high yield can shift to a lower risk profile without

team’s alpha-by-control approach: ‘We focus on

relinquishing much return in the process,’ Den

risk control. We diversify our investments, make

Hartog asserts. ‘Investors who currently favour

many smaller bets. This limits downside risk. In

investment grade can earn a higher return via our

addition, we put a huge amount of energy into

fund without investing in the riskiest companies.

forming our own opinion on companies, into identi-

However, always take the total risk exposure of your

fying discrepancies between creditworthiness and

portfolio into account. Focus on quality is essential,

credit spreads.’

especially at this stage of the credit cycle.’ 

Rik den Hartog, Senior Portfolio Manager

Luuk Cummins, Portfolio Manager Disclaimer Kempen (Lux) Euro High Yield 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. (Kempen) is the management company of the Fund. Kempen is authorised as management company and regulated by 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 6C, route de Trèves, L-2633 Senningerberg, Luxembourg and on the website of Kempen ( 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.



Perverse monetary stimulation in a bizarre scenario After years of economic slump, growth is

now behind us, but in my opinion equities

Dutch and German bond yields to fall.

now at above trend around the world, con-

will continue to outperform bonds in 2018.

A bizarre scenario? Possibly. Yet it was

cerns about deflation have finally dissi-

Central banks will probably continue to be

discussed recently at a pension fund

pated and calls for interest rate increases

cautious about raising interest rates, as

investment committee meeting I

are becoming ever louder. Unconventional

inflation is not yet a major issue. As long as

attended ...

monetary policy is no longer needed.

interest rates remain low, lending will not

I assume that the basic scenario will occur,

The question investors need to answer is

be squeezed. Yet companies will want to

but it is worth remembering that no-one

how the mix of growth, inflation and mon-

profit from the low interest rates and

knew what we were starting with quantita-

etary policy will pan out. I would like to

increase their levels of leverage. As long

tive easing and no-one knows for certain

present you with two scenarios. Firstly the basic scenario, in which normalisation occurs as expected. The other scenario is one in which the perverse monetary stimulation of the past few years comes back like a boomerang.


Will this be the

how it will end. ď Ž

longest economic cycle in history?

Elsewhere in this magazine it is suggested

as bond investors do not apply the brakes

that this economic cycle could well be the

to credit growth, the engine will continue

longest in history. As the typical late-cycli-

to function.

cal aspects have still not materialised,

I promised you an alternative scenario as

there is as yet no reason to make the

well. Just imagine: financial markets fail to

switch from equities to bonds. Valuations

work properly as a discount engine. To

have been cranked up, but as long as

overstate the case somewhat, current

there remains a wide gap between the

equity prices are simply a reflection of the

return on capital (margins) and the cost of

low interest rates and not of an upturn in

capital (interest rates), it is still worth

future growth. This would mean that the

taking a risk. There will come a point

central banks’ unconventional policies

when it is no longer worth the risk, but this

have severed the normal link between

is unlikely to be in 2018. The term struc-

deteriorating balance sheets and rising

Roelof Salomons

ture has not yet become inverted, nor are

credit costs. Peripheral EU countries have

Chief Strategist at Kempen

debt positions excessive.

simply been propped up by the European

and Professor of Investment Theory &

A neutral risk attitude would seem the most

Central Bank. In this case, halting the

Asset Management at the University

obvious option. The larger part of the diver-

monetary experiment will cause equity

of Groningen

gence between the two asset classes is

prices to decline, spreads to widen and




Kempen Outlook October 2017  

In our Outlook we look forward to 2018 and beyond. We dare to predict that a number of interest rate hikes will be implemented in the US. Wh...

Kempen Outlook October 2017  

In our Outlook we look forward to 2018 and beyond. We dare to predict that a number of interest rate hikes will be implemented in the US. Wh...