PGIM Fixed Income: Three Dutch investment themes for 2025
What are the key investment themes in the Dutch institutional market for 2025 and beyond? Anna de Jong, Head of Client Advisory Benelux and Nordics at PGIM Fixed Income, has identified three topics poised to shape the industry.
New Pension System: Looming Liquidity Risk
As a result of the upcoming pension reform, some Dutch pension funds are considering to increase their allocation to private alternatives. While focusing on the risk-return profile and correlations, I think they might invite potential liquidity issues into their new asset allocation.
Think about it this way: When you sell out of the known 'shock absorber' liquid fixed income, how do you manage your liquidity needs in times when equity markets reprice? Right, you might have to sell your equity positions at lower levels or your illiquid assets at a substantial discount. Worst case, this may even impact pension funds’ ability to pay out pensions. Should an ability arise in the future to withdraw money before the statutory retirement age this effect could be amplified, especially when made possible at a favourable tax rate.
This risk is real. We have seen liquidity issues in countries like the UK and Australia in recent years. Accordingly, liquidity management needs to play a more prominent part in how schemes are managed after the transition, especially as the Dutch pension world is not (yet) used to this new way of thinking.
It’s clear that pension funds need an asset mix that can weather any storm without suffering from liquidity pressures. One way of achieving this would be having a chief liquidity officer, someone who continuously stress tests liquidity needs.
Asset Management: More With Less
In fiduciary management, we are moving towards a narrower competitive landscape, consisting of fewer but larger players. This year again, several large pension funds outsourced their fiduciary management services, and we are likely to see more funds joining them going forward.
Consolidation is also happening on a mandate level. So instead of routinely hiring at least three asset managers for a particular part of the portfolio, you are starting to see fiduciaries going for two managers instead, thereby increasing efficiency. Larger mandates present strong growth potential for a smaller number of asset managers.
Investment Targets: Known What You Own
Dutch pension funds are increasingly recognising the importance of being more involved in their portfolios. This goes way beyond being able to explain why they are invested in a specific country or company, say with comparatively low esg-scores.
Let’s take the example of a fund targeting a positive contribution to combating climate change: To become Paris-aligned, meaning the underlying assets contributing to limiting the rise in average global temperature to well below 2°C above pre-industrial levels, pension funds look for ways to reduce their carbon footprint. Excluding the worst polluting companies, using backward-looking data, might seem like a good approach at first, but if you’re taking a closer look, only investing into companies that are already “green” is not contributing to real change while limiting the possibility to outperform.
Instead, a forward-looking focus on carbon trajectories, specific plans and concrete measures of companies and governments to reduce their emissions is gaining momentum. This approach focuses on carbon reduction rather than carbon footprint. It means being more actively involved in portfolio composition and steers investments towards corporates and sovereigns that make a vital and proactive contribution to reducing the impact of global warming and that are part of the energy transition.