Peter Branner on responsible investment in times of Corona

Peter Branner on responsible investment in times of Corona

Published on: 29 July 2020

“Sustainability and digital transformation are becoming more important than ever”

The corona crisis initially hit the investment portfolios of APG hard in March and it also came with many opportunities for active investors like APG. Peter Branner, Chief Investment Officer APG Asset Management, looks back on an eventful first half of the year 2020.

 

A rollercoaster: that could be the way to describe the first period of 2020 for the investors. A good return of 17.3 percent was achieved in 2019. After that peak, the financial markets significantly dropped this spring, but then recovered remarkably in the second quarter. With steering and counter-steering, looking ahead and thinking in scenarios, Chief Investment Officer Peter Branner tried to meet the challenges in the best possible interest of pension fund clients.

 

The corona crisis led to a dramatic fall in share prices on the stock markets: panic?

“There was indeed panic in the financial markets but not for us. As a long-term investor we took a few deep breaths after which we calmly took on the challenges presented to us. Our response to the crisis was a three-stage rocket. The first priority was to take care of sufficient funds available to pay the pensions and respect our other financial obligations. Every day, I closely monitored our liquidity position, the hedging levels, the VIX (indicator of equity market volatility), oil prices and the USD as these numbers gives a good sense of the market situation. And I still do. We witnessed major movements in the dollar rate and immediately to action where needed. The oil price dropped as well and we even saw a negative oil price arising in the beginning of April: people buying barrels of oil actually received money because of a dramatic drop in consumption. We had foreseen this development and adjusted our futures contracts in time.”  

 

What was part two of the rocket?

“Being active investors, we constantly adjust our portfolios also and precisely in a crisis that makes sense. We consequently had a higher turnover in our equity and credit pools where pension fund client are given access to active portfolio management at APG. The industries that would be affected negatively quickly manifested themselves during the lockdown, such as energy companies and travel operators. That is the reason why we reduced our exposure to cruise companies. On the other hand, we purchased shares of companies benefiting from the crisis, such as DIY companies, providers of home entertainment, online retailers, and holiday resorts. We thoroughly assessed all companies included in our investment portfolios: will they be affected by the crisis only temporarily or permanently? And how vulnerable are these companies, for example because they purchase their goods far away? We are now mainly focusing on companies that will survive the crisis just as strong or even stronger as they were before.”

       

Does this mean the crisis also offers opportunities?

“Definitely. We purchased shares and credit instruments in companies that decreased in value due to the crisis, but we expect are strong enough to survive, such as specific automotive manufacturers. Some companies became inexpensive to an extent we repurchased the shares, such as cruise companies. Even if these companies are in for a difficult period ahead our portfolio managers found the reduced prices extraordinary attractive. In Asia, we mainly invested in IT and Internet companies. A global supplier of restaurants had also been on our wish list for quite some time. Those shares were always too expensive, but as the catering business collapsed, we were now able to purchase those shares all of a sudden. Several of these examples shows the benefit of being a long term investor avoiding behavioral bias.”

 

What truly made you awake at night?

“That brings me to the third stage of the rocket: in addition to shares, APG also invests in private companies, real estate and infrastructure. Those investment decisions require a long period of preparation. Compare it to how you privately should take time to decide on major purchases, such as a car or a house. Moreover, you first want to see it for yourself: be able to kick the tires or check the window frames for wood rot. But the crisis made it impossible for us to check out those companies and building projects ourselves. The pipeline for investments is still filled pretty well, but how long will it take for that to run dry? That concerns me. We need new supply in order to also realize returns in the future. Or find new ways to do the due diligence.

 

Secondly I am obviously worried for our people. It’s been a while since many have had a normal day in the office. I spend a lot of time in digital coffee breaks with old and new colleagues to support them. I am very proud of the organization but we need to keep up the spirit.”

 

APG is a responsible investor. How was that expressed during the crisis?

“First of all, we purchased Covid 19 bonds for an amount of over half a billion euros on behalf of our pension fund client: that money is used to support care institutions and SMEs suffering the consequences of the crisis. Those bonds also produce returns by the way. We further looked at each company to see whether our support as a shareholder was necessary and desired, for example with some additional capital or by refraining from the payment of dividend. We also held companies accountable for their approach of the crisis. Such as Amazon, because of the corona infections in their warehouses. We always communicate with companies about the way in which they are being managed, their social policies and the way they handle the environment. The crisis intensified those conversations even more. Being a responsible investor requires credible hands-on activity.”

 

APG invests the assets of pension funds, such as ABP and BpfBouw. How often did you interact with one another in the past couple of months?

“On a daily basis where needed and by means of a call every week where agreed. Prior to the crisis that frequency was more like once every two weeks or every month. As an administrative organization, the pension funds provide us with a mandate: what we can and cannot invest in, the level of risk we are allowed to take and the allocation across the different investment categories, such as shares, bonds and real estate. Fluctuations can easily arise due to price falls and other market movements. Moreover, as an investor you want to be more active in purchasing and selling equities during a crisis. Those are the matters you discuss together. In general, we were able to work with those mandates really well. The big picture is clear: together we strive for a balanced portfolio and limited risks in order to achieve solid investments result in the long term.”

 

What does the balance look like after this semester?

“This differs per market and investment category. In the Western developed markets, we see a modest recovery after the initial struggle, and we are happy with that. For our real estate portfolio, on the other hand, this was not a good half year: performance is lagging behind market but there are also some more technical reasons with the benchmark that we need to explain carefully to clients. I am less worried about the longer term performance but even our five year numbers require specific and precise communication. Emerging economies are struggling, which is worrying for both humanitarian and investment reasons. By the way, China is emerging stronger from the crisis: that country came faster out of the lockdown and is also undergoing a digital transformation that is much more advanced than one might expect. This will help China enormously in the years to come.”

 

Should participants be concerned about the consequences of the crisis for their pension?

“Unfortunately, we probably cannot show the same investment result this year as in previous years. However, stock markets have shown remarkable recovery and resilience since mid-March due to the strong liquidity support from central banks and forceful financial stimuli from governments. In addition, we have a long-term investment horizon, so we can spread lower returns over time. There are many reasons for participants to be concerned about the corona crisis, the future pension system, purchase power and the risk of social unrest. Many of these risks are there for the longer term and as long-term investors we can only do our best to assure participants that we take our responsibility very serious.”

 

How do you perceive the future?

“Economic recovery is only possible once the virus is gone or a vaccine is available. As an investor, we apply different scenarios, ranging from favorable to worst case: The Good, the Bad and the Ugly. We already try to look beyond the crisis. If people continue to work from home more often, what will be the consequences for office spaces, the activity on highways and railways? We have noticed an acceleration of the digital transformation and the awareness of sustainability. Those two megatrends will become even more leading in our investment policy. The corona crisis has changed the world forever. And we change with it.”

Published in these collection(s)

Responsible investing

Collection in Sustainability, Long-term investment