Actions have consequences. As a responsible investor, we know this is true of the decisions we make on behalf of our clients. Our latest Responsible Investment Report explains our actions in 2019.
On 1 April 2018, the Douwe Egberts Pension Fund (DEPF) transitioned to general pension fund Stap, for which TKP Investments manages the assets. Commenting on the transition, Elvin van den Hoek, Director of DEPF’s Management Office, said, “The team at TKP Investments approached it like architects.”
Once the parties negotiating the collective labour agreement for Jacobs Douwe Egberts Nederland had decided that new pension accruals would be transferred to the PGB pension fund as of 2017, the DEPF was closed as of the that date. As a result, management were faced with the task of finding the best home for the scheme’s accumulated pension rights.
Over recent years, many investment categories have increased strongly in value, partly due to low interest rates. A number of categories, including US equities and many fixed-income categories, could now be considered overpriced. Investors can respond to this in several ways, for example by allocating more to illiquid investments. Attractive alternatives in other investment categories could also be considered. For example, in terms of equities we see emerging markets as having a relatively favorable outlook.
Relative valuations of equities
The relatively favorable outlook for emerging market equities is based on relative valuations of various equity markets. Although it is virtually impossible to predict stock markets in the short term, the Shiller Price-Earnings (PE) ratio is one of the best indicators for long-term equity returns. This indicator is based on the ratio between the current stock price and inflation-adjusted profits over the previous ten years. The ratio can be used to determine the value of equities relative to historical values and to identify differences between regions.
Favorably priced equities in emerging markets
The Shiller PE ratio highlighted considerable differences between regional equity markets at the end of the first quarter of 2018. The value for the United States was 29.8 compared with 24.7 for developed markets and 17.2 for emerging markets. Although these ratings are well below the values seen before the dot-com crash in 2000, they are higher than just prior to the financial crisis in 2007. Current valuations are at a level where, historically, corrections have taken place.
Relative valuations should be considered in context. For example, historically, stocks in the United States have had a higher valuation than stocks in other regions. But even if this is taken into consideration, the conclusion that equities from emerging markets are favorably priced compared to equities from developed markets still holds true.
Emerging Markets fund combines regional and worldwide mandates
The TKPI MM Emerging Markets Fund provides a vehicle to leverage opportunities offered by equities in emerging markets. The fund invests through mandates with selected external managers. This results in a unique combination of regional mandates on the one hand and global mandates on the other. This means that investors not only benefit from regional expertise but also from trade-offs between companies in different regions.
Long term investments in quality companies
Our strategy is primarily to invest for the long term in companies that are able to achieve strong results despite changing market conditions. The turnover rate in the fund is therefore low, which means that transaction costs are kept to a minimum.
Portfolios managed by external managers are concentrated around a relatively small number of companies. This is based on the belief that it is better to reduce risk by investing in companies that you know inside out, rather than spreading investments over a larger number of lower quality stocks. By combining several managers in the fund, an optimal risk-return ratio is achieved.
The results achieved by the fund so far have been outstanding, with annual returns of more than 8% over the past 10 years. It has also outperformed the index by more than 3% per year.
In many regions, stocks are currently overpriced, particularly in developed markets. Based on the Shiller Price-Earnings ratio, however, equities from emerging markets – home to a significant proportion of global economic growth – are more favorably priced. This offers opportunities for investors, particularly if regional mandates are combined with worldwide mandates, as we do for the TKPI MM Emerging Markets Fund.
Authors: Sibrand Drijver, Senior Investment Strategist, and Anton Kramer, Senior Portfolio Manager Emerging Markets
At TKP Investments we’ve noted that our clients are increasingly looking for ‘dark green’ products. In other words, products where sustainability aspects are a given and not simply a consideration. This prompted us to carry out research into green bonds, to identify what it is that determines the green character of these bonds and whether they can be an interesting investment solution for institutional investors.
The last quarter was characterized by somewhat weakening economic growth in Europe, political unrest in Italy and a stronger US dollar. Inflation in Europe remained low, while inflation in the United States continues to increase marginally. Furthermore, tax reforms mean the US federal government is expected to make increased use of capital markets. The 10-year bond yield in the US responded by rising above 3% at the end of April. In Germany, bond yields remained at around 0.4%, resulting in an increased gap between US and German interest rates. Political turmoil in Italy increased pressure on the Euro versus the dollar.
The first four to five months of the year in TKP Investments’ Operations Department are traditionally dominated by year-end closing. It’s a hectic period during which the team makes every effort to collect and process all the necessary data.
At the end of last year, I bought a beautiful house in Groningen. Built in 1920, it had been maintained and cherished by the previous owner since 1975. I was sold the minute I stepped through the door: Stunning rooms with lofty ceilings, lots of light and wooden floors, and an amazing atmosphere. It also came complete with a dated kitchen, ancient bathrooms and 1970s cladding which stretched as far as the eye could see…
Following the record highs seen in January, stock markets around the globe experienced a sharp fall in the first week of February. After an extended period of stability, the VIX-index – a popular measure of expected volatility – increased to levels comparable to those of the financial crisis in 2008. What was behind this and is it an indication of growing concerns over the future?
“There is no ‘Plan B’ because we do not have a ‘Planet B.’ We have to work and galvanize our action.”
UN Secretary-General Ban-Ki Moon
A pension fund’s key objective is to provide a good pension for its participants. At the same time, a good pension is worth significantly more in a livable world. World leaders recently reached agreement on concrete goals for a better world. These are defined by 17 Sustainable Development Goals (SDGs). The SDGs’ objective is to reduce poverty, inequality and climate change. Institutional investors, like pension funds, have the financial means to make an important contribution to these goals.
The dark days before Christmas have come again, a time that invites reflection. A good starting point for reflection is a time when you are confronted with ‘something different’. I experienced such a time recently.
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