Baskets of shares in sustainable companies, where the client can choose from different sustainability grades. That is how you could describe APG’s new investment product. The launch of iSTOXX APG World Responsible Investment Indices in September 2021 is a joint response by pension administrator APG, index provider Qontigo and asset manager BlackRock to the growing demand for customized, sustainable index products. For an active investor like APG, this step may come as a bit of a surprise at first glance, as the pension administrator is not known as a great advocate of what is irreverently known as “passive investing”. An interview with APG’s Ronald Wuijster (member of the board responsible for asset management) and Ronald van Dijk (managing director of quantitative strategies). “We primarily want to offer the best solution for our clients. In certain cases, that may include an index product.”
The difference between an active investor and an index investor is that the former aims for a higher investment return than the average on the stock market or a certain stock market index (weighted average of several important stocks or other investment categories, such as the AEX, S&P 500 or Nikkei 225). The index investor, on the other hand, invests in a basket of shares whose return is approximately equal to that of the market as a whole. The “iSTOXX APG RI Index Family”, launched by APG, Qontigo and BlackRock, consists of five “Responsible Investment Indices” and is therefore an index investment product. That is a step you would not really expect from a pension administrator that has always shown itself to be a staunch active investor.
For the first time, APG is offering pension funds the opportunity to invest in indices. Have you fallen away from your faith?
Wuijster: “Let me say first of all that we still advocate for a very active form of investment for those clients who have the opportunity to do so. But that form also involves higher costs and is therefore only attractive from a certain asset size. Not every client has that size. There are smaller funds that want the low cost of an index product, but want to be active on the ESG front (exerting a positive influence on sustainability and corporate governance, ed.). It is precisely for those funds that this product is suitable. In addition, some clients are simply less convinced of investment analyses as a method of selecting certain companies. Ultimately, the client decides what is good for him. We then want to offer the best solution. That solution is somewhere on a continuum, with a very active investment policy at one end and pure index investing at the other end. The “iSTOXX APG RI Index Family” is not the ultimate in active investing, but it does have active components. In short: we have certainly not abandoned our beliefs, because we are still sincerely convinced of the value of active investment and if it is possible for a client, we also advise it. But we primarily want to offer the best solution for our clients. And in certain cases that can therefore also be an index product.”
What do those active components consist of?
Van Dijk: “The basis of this product consists of the 'iSTOXX World Index' over which five filters (see box, ed.) can be placed, depending on the preference of the customer. The first filter is 'Exclusions'. By applying that, you exclude companies that do not meet certain sustainability requirements. You could call that the entry level of this product. By applying additional filters, you increase the sustainability content of your investment portfolio. The criteria then become increasingly stringent and when all five filters are applied, the most sustainable portfolio is created. In this way you go further than just investing in, for example, the iSTOXX World Index. That makes it a somewhat more active form of index investing. As far as we know, there is no other index series yet, where a pension fund can consistently opt for an increasingly ambitious SRI policy over time.”
Isn’t there a risk that this index product could cannibalize your range of active investment activities?
Wuijster: “This is unlikely to happen, if only because this product offers just a fraction of the investment mix you need as a pension fund. This product is suitable if your pension fund is not of the scale that makes active investment attractive, but you do have serious sustainability ambitions. But if you do have that size, you can still achieve higher returns by active investing.”
What does the most sustainable form of investment in the iSTOXX APG RI Index Family look like?
“In concrete terms, you then have the companies from the iSTOXX World Index, which certain companies - the Exclusions - are removed from. The sustainability leaders are then selected from what remains. From these, we then select the companies with low carbon emissions. If you then select the companies that contribute to achieving the UN Sustainable Development Goals, you are left with the most sustainable portfolio. This is then optimized so that the risks are virtually the same as those of the broad index - the iSTOXX World Index.”