As a long-term investor, how do you deal with the short-term developments in a rapidly changing world, resulting from Covid-19? How do you not get distracted by the issues of the day? Enterprising investment in real assets is the name of the game, says APG’s Ronald Wuijster, executive board member, responsible for Asset Management. This means direct investments, without intervention from financial markets. Wuijster spoke about this during the World Pension Summit, which is happening from October 19 to 23.
An institutional investor like APG invests for the long term. That makes sense, because the financial obligations of a pension fund last well into the future. The advantage of this is that you have time to allow an investment to fully mature, if necessary. The returns do not have to be withdrawn from one day to the next. However, that does not mean that you can just ignore all short-term developments, especially if these are extreme developments, such as we are currently experiencing with Covid-19.
Whether it concerns government bonds, shares, real estate or private equity, today’s expected returns have all fallen by about 2-3%, as compared to 2012. Wuijster: “That may sound like a modest decline, but over a period of several years, it signifies a considerable dent in invested assets. If you look at the causes of that decrease in returns in the past few years, roughly four factors emerge. Low productivity growth in companies and an increase in government, company and household debts. Those are the first two. In addition, during the past five years, the central banks have also pursued a monetary policy by rapidly buying government debt – to stimulate the economy. And the increasingly intensive search for investment that will still generate some returns, has also put further pressure on returns.”
Please note: this was the situation up until March of 2020. The outbreak of the Corona pandemic had a further accelerating effect on all four of these trends. In other words, the expected investment returns further declined, because of it.
Masks and medications
At the same time, Covid-19 is accompanied by several trends that you can take advantage of as an institutional investor, according to Wuijster. “The tendency of authorities to act with decisiveness and intervention is greater than the fear of getting into debt. This creates opportunities to invest with those authorities in projects that are aimed at softening the crisis. In addition, face-to-face meetings have rapidly decreased, which has a significant impact on retail, the office market and travel behavior. And that, in turn, provides interesting opportunities for investing in infrastructure, but also requires a re-orientation within the real estate portfolio: does it fit in optimally with these developments? What we are also seeing is that a development is occurring where particularly crucial production – masks, medications – are being ‘brought home’ again. That development, incidentally, had already started before Covid-19; the long value chains between, for example, China and Europe are seen as too vulnerable. As long as things go according to plan, it seems to work fine, but if just one little thing in the chain goes wrong, the consequences are huge.”
Another trend Ronald draws attention to is the boost that working remotely got from Corona. Because, once people are used to working that way, how small is the step to offshoring? Does that legal analysis really need to be done in Amsterdam, or can it also be done in Delhi? Services are becoming marketable at a furious pace, which may lead to a new globalization wave, Wuijster predicts.
The Corona age therefore brings its own investment opportunities with it, but it is also clear that as an investor, you seriously need to take into consideration the threat of a lurking financial crisis.
The door remains closed
In a world in which safe assets with sufficient returns are really no longer available, “enterprising investment” is the name of the game for an institutional investor. These are direct investments, without the involvement of financial markets. And that is exactly why there are advantages for a big investor like APG. Wuijster: “Due to the scope of the invested assets and knowledge of local markets, there is access to such real assets, while the door remains closed to parties that don’t have the same large scale. That scope is also required for being able to monitor those direct investments, which is, of course, a much more labor- and knowledge-intensive process than investing in the stock market.”
Finger in the pie
These kinds of investments in real assets offer the opportunity to have a significant finger in the proverbial pie. Those strong governance rights are really essential for the further development of our real assets investment portfolio, as far as we are concerned. In addition, partnerships play an important role as does cost efficiency in the investment process. We must also be able to influence the sustainability and governance factors that are relevant for a specific investment,” Wuijster states.