“Sustainability should not be used as an excuse for mediocre returns”

Published on: 23 February 2022

634 billion euros. That is APG’s total invested assets worldwide (position as of the end of December 2021). The goal: a good pension in a livable world for the funds' participants. The portfolio is diversified, of course. From investments in wind farms in Zeeland to Australian listed shares in stores. And from safe bonds to the somewhat more fluctuating trade in gold or soy. Who are the people behind these investments? What drives them? What choices do they make? And why?

In this episode of the series The Investors: Ton van Ooijen, whose responsibility at APG is to invest in consumer goods in the developed markets.

It was big news recently: Unilever’s takeover bid for GSK’s consumer division. This came as a surprise to many, including APG. In a response, the pension administrator wrote that it did see many strategic advantages to entering the field of consumer health on a large scale. So why was APG not overly happy about Unilever’s bid?

Van Ooijen: “In and of itself, there was not much to criticize about the acquisition. But Unilever is currently in transition and is working to increase its turnover to a higher level. They would therefore be better off focusing on putting their own house in order and showing that there are enough consumers for their own products. So the offer was a bit unfortunate in its timing and also probably a bit on the high side. But the fact that they want to expand into vitamins and toothpaste doesn’t strike me as odd. They already sell toothpaste, so they can use their own distribution network in emerging markets for that. In addition, about two years ago, Unilever bought GSK’s Horlicks brand of nutritional drinks, and it is doing very well. These are interesting things that are part of the bigger picture. So, in the longer term, I am not too worried about Unilever.”

First, about your work: you focus on developed markets. Isn’t a portfolio that focuses on emerging markets much more exciting?
“The emerging markets are very exciting. But many companies that fall into my portfolio get most of their growth from those emerging markets. So, there have been discussions at times about whether a company belonged in my portfolio or in the emerging markets portfolio. So, we agreed that the main listing of a company would determine which portfolio it fell into. For Heineken, for example, more than half of their sales now come from emerging markets. Nigeria used to be important to them, now it’s Vietnam, Brazil and Mexico. For Heineken, those countries are more important than America. But because the company is listed on the AEX, it is included in my portfolio. For beauty companies like L’Oréal and Estée Lauder, China is now the biggest growth market, but they are included in my portfolio as well. And in the name of the world's largest brewing chain, AB InBev, ‘AB’ stands for American Anheuser Busch, ‘In’ for Belgian Interbrew and ‘Bev’ for Brazilian AmBev. Most of the companies in my portfolio are really global companies. So, it's not as boring as you might think; in fact, it’s quite fascinating.” 

Back to Unilever. In addition to criticism of the takeover bid, the company is under fire from activist investors for a more fundamental point. The company is said to be too concerned with sustainability at the expense of profitability. APG is convinced that performance does not have to come at the expense of sustainability. Do you understand the concern of the activist investors?
“Yes and no. Sustainability by itself is not a good reason to invest in something. But we do think that sustainability can lead to innovation and the creation of additional demand. And that, in turn, can lead to higher returns over a longer period of time. At Danone, for example, the emphasis on sustainability seemed to come at the expense of a focus on revenue and profit growth. But a company like Nestlé is also at the forefront of sustainability and they do manage to come up with innovative products that they can charge a higher price for and therefore also achieve greater profits. So, we don’t agree with investors who think that sustainability only costs money and is bad for investors. But sustainability should also not be used as an excuse for mediocre returns for a portfolio that could do better, as with Danone.”

It is important to APG that the companies it invests in have sustainability as a top priority. What does APG do to prevent activist investors who have little to do with sustainability from hijacking a company’s share price?
“We make it clear to them that we think sustainability is very important and that you can also show superior profit growth with it. But you do have to combine it with innovation and marketing, so that you come up with a product that is not only good for the planet but also for the consumer. Unilever was criticized by British fund manager Terry Smith for putting too much focus on sustainability. But I think he is fine with Unilever developing innovative products and linking that to sustainability. A company has to make products that the consumer wants, and sustainability is a trend in society too.”

Everything is accelerating more and more. But as a long-term investor, we don’t have to go along with the frenzy of the day.

You have been working at APG for quite a few years. What do you see as the added value of working for this institutional investor?
“As APG, you are somebody and companies are therefore often interested in how we look at things. We are currently looking at investment opportunities in sustainable food. If we then want to ask a company about their ESG policy (Environmental, Social and Governance; the three central factors for measuring the sustainability of an investment, ed.), we get to speak to their specialists instead of just a spokesperson. Through these conversations you notice that they consider APG to be an important discussion partner. That really is an added value of working at APG. Another big advantage is that we have so-called 'sticky money'. That means that if a company performs a bit less during a quarter, we don’t immediately pull our money out. We therefore have a longer time horizon than many other investors and that is also an advantage. Because it means that you can also invest in companies that initially seem expensive, but in the longer term can show growth that is greater than the average economic growth.”

As Portfolio Manager for Developed Markets Equities, you are on top of developed markets. In which sectors do you expect the most growth in the coming years?
“Most of the growth is still in the more expensive products. When it comes to consumer goods, you have to think of the high-end cognacs, malt whiskies and premium beers, for example. These are different in every market, incidentally. For example, Budweiser is a premium beer in China but not in its homeland, America. People are getting wealthier and are not so much buying more food as they are eating better. As investors, we are mainly interested in price increases because a product has improved, not because of inflation. The sectors in which companies are able to develop products that people are willing to pay more for, through innovation or marketing, are the most interesting to us. We expect greater growth in the longer term from investments in these sectors. This also applies to the more expensive skin care and dermatological products. For example, the MAC and Clinique brands of Estée Lauder and La Roche-Posay and Vichy of L’Oréal. Those products fit into the health and wellness trend.”

There is currently a shift taking place in terms of consumption, from ownership to access and e-commerce. What consequences does this have for the way we invest?
“Digitalization is important because there is now a lot more data known about consumers and their behavior. You can therefore serve consumers much better. A lot of information about you and me is known, and the brands that are furthest along in this, such as L’Oréal, really benefit from this and also show higher sales growth than other companies. That’s an important development. You also see the generation that wants everything now, like the Gorillas and other flash delivery companies of this world. These are the digital and innovative competitors for the supermarkets. That’s why they need to invest in e-commerce even more quickly. Due to the pandemic, the supermarkets showed a nice growth in profits, but now their competitive position is deteriorating. As investors, we do take this into account.”

It sounds like digitalization is definitely going to affect your portfolio. What other developments do you see happening in the coming years?
“Everything is accelerating more and more. But as a long-term investor, we don’t have to go along with the frenzy of the day. That’s our big advantage. We have to ask ourselves what the structural trend is. Plant-based meat was a hype for a while and some producers got astronomical valuations on the stock market. Fortunately, we did not go along with that hype, because now you can see that that strong growth has faded, especially in America. But now large companies such as Nestlé and Unilever are entering the market for plant-based meat. However, they have much more capital at their disposal than the small companies and, as far as I am concerned, are therefore more interesting to invest in than the small companies that started the hype.”

Who is Ton van Ooijen?

Studied macro and business economics at the Free University. He also obtained a propaedeutic diploma in history. And he took courses to become a Certified Financial Analyst.

Interest in investments
“My interest in investments goes back a long way. It has to do with the fact that I like history. I think the past is important and provides a foundation for the future. And I like numbers. If you combine that, you soon end up with economics. At the Fundamental Stock Selection department, we mainly invest bottom-up. This means that we look at the fundamental developments in companies. But macro-economic aspects also play a role: what will countries do, and what will happen to interest rates? The core remains: what does a company do and is it an attractive investment?”

Working at APG
“I first worked for various brokers, advising individual clients. At one point I got the opportunity to work for APG. The great thing is that here I get to invest myself instead of just giving advice. It really is a profession where you learn every day, and you are responsible, which I think is a great advantage of working here. I also see what the result of my work is, at least in the longer term. Another positive point is that many of my family members are participants in the pension funds that APG serves. For example, my father was a teacher and my sister still is. So, I work for my family, as it were. I see that as an added value. You’re doing something good, you’re learning and what you do has an impact. Those are things that everyone would like to have in their job.”

The fast-moving consumer goods in the developed markets, namely: Europe, the US, Australia, Japan, Hong Kong and Singapore. “The portfolio I am directly responsible for is worth 1.8 billion euros. But what I do is copied by an umbrella portfolio, which has about 2 billion euros in the same funds as I have, but sometimes with a slightly different weighting. That is related to risk management. If I were to overweight growth stocks, we would get a style drift and we don’t want that. The portfolio manager of the coordinating portfolio then rectifies this. He not only looks at my portfolio, but also at other portfolios.”