Dutch pensions place Asian fund allocations on hold
Despite a significant increase in allocations to foreign investment funds in the last two years, Dutch pension funds’ allocations to Asian funds have hardly budged, according to data provided to AsianInvestor by DNB, the Dutch central bank.
Direct holdings of Dutch pension funds in Asian investment funds are currently €1.5 billion ($1.62 billion), slightly higher than the €1.4 billion at the end of 2021, according to the DNB data.
Indirect holdings – Asian exposure held through Dutch investment funds – are currently €6.7 billion, the same as they were in 2021.
Over the same period, they have increased allocations into foreign investment funds as a whole by €25 billion, according to DNB.
A DNB spokesperson told AsianInvestor the increased allocation to foreign investment funds reflected a shift in investment strategy, as funds sought out private equity and real estate.
“[The shift] shows a change in investment policy. We see notably investments in investment funds in the US, [although] we not know the background of this development,” the spokesperson said.
STRATEGY SHIFT
Frans Verhaar, senior director at bfinance in London, attributed the shift to increasing interest in private markets.
bfinance
“I do think there is an ongoing shift towards allocating more to private markets for Dutch pension funds, which may certainly explain the shift to foreign investment funds.
"The reason for investing more in private markets is the same in the Netherlands as in other countries – the search for yield, finding diversification and harvesting illiquidity premium,” he said.
Fund allocations represent a small proportion of Dutch pension funds’ total Asian allocations.
DNB data show that the €8.2 billion invested via funds represents just 6.9% of the €119 billion they have invested across Asian equities (€96 billion in total), fixed income ($10 billion) and property (€13 billion).
MISSING MANDATES
Meanwhile, a large-scale switch from domestic funds to mandates by Dutch pension funds has also left Asian fund allocations largely untouched, according to DNB.
Dutch pension funds sold €364 billion from domestic funds between 2019 and September-end 2023.
“The figure [represents] the net outflow of pension funds’ assets from domestic investment funds,” said the DNB spokesperson, adding that the vast majority of the those were transfers to mandates.
Using the same proxy measure, the shift to Asian mandates has been minimal: in Asia, over the same period they sold just €2.6 billion out of their total €112 billion allocated to investment funds in the region.
Mandates often provide pension funds with greater customisation and control when it comes to sustainability and ESG [environment, social, and governance].
While this was a significant reason for the shift, the move also supports improved compliance with recent domestic regulations, according to DNB.
“The increased control over things like specifying ESG requirements is not the only motive for shifting investments from investment funds to mandates. Regulatory requirements also play a role in this development,” the spokesperson said.
ASIAN ESG GAP
Dutch pension funds’ preference for direct investing in Asia, which provides them with control over monitoring ESG in-house, may create less requirement for a shift in these allocations.
However, there is a growing need for improved ESG oversight when it came to the sector’s Asian allocations, noted a November 27 report by the Association of Investors for Sustainable Development (VBDO).
VBDO is a Dutch investor organisation whose members include many of the Netherlands’ leading pension funds.
“As a result of the growing demographic and resource challenges within these markets, and the potential for environmental damage, a more sustainable approach to economic development is crucial for emerging markets,” it said.
Brookfield AM
The report added: “Since emerging markets are increasingly seen as interesting investment opportunities because of their potential for economic growth, they deserve special attention from investors when it comes to ESG integration.”
But Bob White, managing partner and head of client relationship management at Brookfield Asset Management told AsianInvestor that mandates do not necessarily provide the best way for investors to control and monitor their ESG objectives either in Europe or Asia.
“For some investors, funds are the right solution. For some, customised mandates are the right solution and for some, it is a hybrid of the two. ESG requirements are, and have been for many years, embedded into both mandates and funds,” he said.