Listening out for Asia deals

Not since 1997 when UK rock star David Bowie issued his famous Bowie bonds, which securitised future royalty income from his music back-catalogue, has European institutional investment felt
so glamorous.

When Ronald Wuijster arrived from Robeco eight years ago to head strategy and research for APG Investments, the firm had just launched an internal innovation committee to encourage staff to come up with investment leads.

A keen music fan, Wuijster proposed buying the intellectual property for popular and classical music catalogues (as well at those contained in patents for pharmaceutical products). Soon the firm became the largest independent owner of music rights in the world, with the rights to more than 250,000 songs, an investment worth close to $1 billion.

Wuijster, now head of asset allocation and board member at APG Asset Management, had spent 16 years at Robeco, co-heading the Dutch firm’s equity department before moving to lead its corporate finance and strategy team.

APG manages money for four Dutch pension funds. The largest, ABP, manages the pensions of 2.8 million government employees totalling €334 billion ($395 billion). As at the end of the third quarter last year it had a funding ratio of 103.1%.

The Dutch firm also manages funds for the country’s construction sector; its housing corporations (quasi government agencies that manage the supply of mid-market housing); the company’s own pension fund; and the funds of its insurance company that provides products targeted at additional income security.

APG’s predecessor firm split from the Dutch finance ministry in the early 1990s, and APG dates its modern history from 1993, when it was granted full freedom to invest in an unconstrained way around the world. Since then it has achieved a 78% investment return with a 22% contribution rate across all funds, at an average return of 7.5% per year.

Q What is the asset mix in your funds?
A This is set by APG clients, which determine their own strategic allocations. For ABP it breaks down like this: 30% in fixed income, with a further 8.4% in inflation-linked bonds. Only 1.3% of the total portfolio is allocated to emerging market debt. Emerging-market equity plays a bigger role, comprising 8.5%, compared with 28% in developed market equity. About 60% of this segment goes to Asia. Alternatives are a big part of total allocations, at 24%. Of this, more than a third is real estate, although these are not divided by emerging markets.

Q How do you approach Asian allocations internally?
A The team in Hong Kong looks after the illiquid investments in Asia Pacific: infrastructure and real estate. For liquid investments it covers equities in Asia-Pacific and monitoring economic developments in the region. Especially with real estate and infrastructure I think you need to be out there and looking for strong local partners. When it comes to many of the more liquid asset classes, we have the view you can manage that from anywhere – Holland in our case. All you need is the supply of information. From our base, we look at the overall management and oversight of emerging market strategies. Specifically focusing on emerging market equities, external manager selection, internal quantitative strategies and emerging market debt.

Q How do you select external asset managers?
A Around the world 20-25% of the total is managed by external managers. In Asia, typically we hire external managers for strategies that require a large local presence, such as concentrated fundamental strategies. In Asia this means high-alpha strategies or where we think there is a very qualified manager. But it could also be a small-cap emerging-market manager, for example, or deep-value strategies or one that covers a specific sector such as biotech.
In the illiquid space we invest through externally managed funds, club deals and joint ventures, with the emphasis on the latter two. We prefer to team up with a small number of like-minded co-investors and reputable local partners with a strong track record that manage the business on a day-to-day basis.
It’s important to select the right partners and form long-term relationships. Piramal in India (a club deal), e-Shang in China and Lemon Tree in India (both JVs) are good examples of the type of partners we like to work with.

Q What is distinctive about your allocation approach?
A I would identify three principles: firstly, diversification. Research from the Edhec Institute [part of the French business school] recently showed that ABP was the most diversified pension fund, both by asset class and risk factor. Secondly, we are long-term investors. Most asset managers have a time-horizon of one-to-five years. Ours is much longer. This means we can take risk on when it is being sold off. Finally, our investments must be managed against the balance sheet of the client, meaning we have to focus on the liability profile and risk attitude of our clients. I would also emphasise our smart implementation approach that focuses on minimising costs. On average, the pensioners we are managing money on behalf of will receive €500 to €1,000 per month when they retire. We’ve set up a treasury division, for example, that can create pooled positions for non-listed derivatives, struck between us and the counterparty, from which multiple pension funds can take part. This reduces the costs to our clients and reduces their operational and counterparty risk.

Q What is your approach to emerging markets?
A Over recent years the deepening of the emerging market debt market has allowed us to build our exposure there. It has also seen us separate the teams who look after emerging market debt from those that look after developed market credits, as we have seen the markets show different beta characteristics and yield opportunities. In general emerging market debt is appealing to us because we like the diversification it provides and our return objectives can be demonstrated there.

Q How do you invest in China?
A Of the listed equities investments in Asia, around 17.5% is in Chinese companies. None of this is via the local A-share market.

Q What would it take for you to invest more in Asia?
A A big reason would be an increase in the range and maturity of markets available in the region: improving operational and financial infrastructure, the development of institutions, the quality of the clearing, the strength of regulation and the safety of ownership rights. It’s also saying that a problem in Asia is that growth doesn’t always translate into investment returns.
Because we like the illiquidity premium we would look to allocate more into credit markets if these developed more – our focus in credit tends to be on the eurozone and US now. We would also be interested to find more private equity firms and hedge funds in the region.
Falling valuations would also be an opportunity. Our long-term investment horizon means we won’t be forced to sell if valuations drop. Weakening markets are an opportunity for us to build positions. A recent example was through 2008 and the first quarter of 2009. Buying during that period saw our emerging market equities grow from €6 billion early in 2009 to €31 billion today, half of which was through new inflow from clients. We might have increased exposures a little last summer, but not during the volatility in the middle of October, it’s too short a period.