A paradoxical and eventful year; that’s what 2022 was for APG. Although assets were down 18 percent, pensions were indexed for the first time in years. CEO APG Asset Management Ronald Wuijster on rising interest rates, the outlook for 2023 and EU sustainability rules.
Ronald Wuijster, APG Asset Management board chairman, doesn’t mince words. 2022 was a very bad stock market year. “For a while we thought it would even be the worst year ever. But it didn’t turn out that way after all. Because in 2008 we ended the year about 20 percent in the minus. This time it was minus 18. That can be explained by a combination of three factors: a market element, an interest rate element and a currency element. Rising interest rates, that’s bad for investments, both for interest rate derivatives and fixed income and for equities. Future corporate profits are valued lower as a result. In addition, the dollar became more expensive against the euro. Pension funds hedge the dollar risk and interest rate risk (partially), but the dollar strengthened and interest rates rose. So, while you could have actually profited, you end up losing money on the dollar hedge. And third: negative sentiment developed in the market, partly because of the rising interest rates and the share prices that were already falling.”
What is the sentiment at AM?
“Obviously, it’s always better for the general mood if you get good results. We always try to do better than the market. But no one can withstand a bad market. On the other hand, our clients were able to index. A strange phenomenon. They were able to make the participants, pensioners and pension builders happy with an indexation, precisely because of the higher interest rate. But for the asset manager, the mood was less positive.”
In 2008, the 20 percent decline was offset by a 20 percent increase the following year. Are you as optimistic about this year?
“We still think it could be a difficult year because we expect that the interest rate hikes are not over yet. Of course, we are experiencing a hiccup because of the banking issues. But we have also seen that the ECB and the Fed do not care much about that. Inflation needs to come under control first. So that means that the negative effects of that will certainly play a role this year too, even though most of that is behind us.”
And a bank crisis doesn’t help at a time like that.
“People often think: it’s up to the banks when these kinds of problems occur. But it doesn’t quite work that way. Of course, these were not the strongest performers. But an economic downturn is often the first thing you see in the banking sector. And then that acts like a peat fire. Because the banking sector is under pressure, they will lend a little less easily. And if companies get loans less easily, that creates less growth, less initiative, therefore least profitability, fewer jobs and lower economic growth. As for investments, in private equity and hedge funds, a lot of bank loans are used to make returns extra attractive. Since they can now also borrow less easily there, those returns may also start to disappoint a bit. In other words, it may still smolder a bit. That is why we are being somewhat cautious. We are not expecting a really bad year, like last year, but we’re not expecting to see an immediate recovery like the one in 2009.”
To what extent do you adjust your portfolio to that?
“We can’t build our portfolio in such a way that there is no sensitivity at all. Because to get returns, you have to take risk. But we can be more careful in the positioning, risk off in jargon. You can see that in the portfolio.”
Last year there was discussion about the costs of asset management. Those costs were significantly lower this year because of the results. What is your expectation now?
“First of all, all of our clients want to be cost-conscious, and that includes us. On the other hand, everything costs money. ABP has de facto said goodbye to hedge funds; other funds such as SPW and bpfBOUW are consciously opting for them. They are convinced of their added value. The discussion about costs is particularly relevant to private equity. 2022 was not a great year for private equity either. As a result, performance payments were significantly less than the year before. But they are still there. We are really doing everything we can to still have a good cost structure for this category. It’s expensive, but we negotiate hard and well to keep those costs as low as possible. For example, we try to take out excessive and extraneous incentives. On the other hand, if you look at private equity in the long-term, they do very well. They also outperformed equities in the market this year. They’re worth it.”
In the U.S., a discussion about sustainable and responsible investing is raging that goes completely against the European trend. Sustainable policies are reasons for some investors not to invest there. What do you think of that?
“In my opinion, a political discussion like that is not making the world any better. There are clients who only give orders if a fund is against ESG. Sometimes you also see the opposite: we will only give you money if you are in favor of ESG. Or only if you are neutral about it. In my opinion, it is not good if positions become too absolute. We believe very much in sustainability goals, as well as in the transition. We think the world needs them. But we do think the discussion is sometimes too black and white.”
And that also applies to EU legislation and regulations in this area?
“Legislation and regulations are good. You have to have a big stick behind the door. Otherwise, people think: oh well, it will take my time. But legislation in this area is sometimes too rigid in my view. We have a lot of investments that are related to the sustainable development goals, which we have thought about very carefully. Partly through the use of AI. Yet some of them do not meet the highest sustainable Article 8 or 9 category. That’s because we haven’t met all the strict procedural obligations. And then you can say: it is greenwashing if you then call those investments sustainable, but that kind of thinking is far too polarizing. The sector has to watch out for that. But now this kind of strict regulation sometimes stands in the way of truly sustainable investments. There are a lot of investment funds that find that because of all these conditions, it’s hard to formally set it up, because you have to go through so many steps and meet so many conditions. The danger then is that interest drops away. While at the same time, you also have to look for innovative investments that are going to make a difference. Perhaps such an investment does not quite fit into the framework on all points, but if you can explain it well, I think it can be justified. Comply or explain; that’s what I like. Currently, it is only comply. And I think that’s a shame.”
We are moving to a more transparent and personalized system. People are getting more insight and want more explanations. Do you expect AM to be more accountable for its choices in the future? And that it will therefore have to go along with the delusion of the day?
“Well, not the latter, I hope. Our main added value is the long-term professional direction. But there is another aspect to the pension pot becoming more personal. It’s like with your bank account. If 500 euros is debited from that, you want to know why. You will also get that effect around that personal pension pot. Not to that extent, but it’s going to fluctuate. Most of the time you'll get that, but once there’s a sharp drop in the pension balance that you wonder about, you’ll want to talk to someone. And if different age groups are also getting different returns, or the neighbor it getting a higher return with a different fund, then you’ll want an explanation. And we need to be prepared for that.”
But the social debate will become more heated. Already people are shouting from the sidelines: we lost this by getting out of Shell. That sound will not leave you unmoved.
“To get good returns, you must not let the delusion of the day lead you. If you do that, you are not going to make a lot of money. You have to analyze well and then take a position. You have thought about that properly and you have to be able to give it time. Or you have to say: if such and such happens, I’ll change my position. But then you have to indicate in advance when you will do that. People who do their own investing understand that prices go up and down. You can look at your portfolio every day, but that shouldn’t scare you. Or you shouldn’t look every day. Not that many people are investing in the Netherlands yet. Because of the transition we are suddenly going to educate the entire Dutch population about investing. We will have to explain and educate more. That demands something of us. But I hope that in the meantime we can continue to do what we are good at.”