kempen insight · for example, abp ‘we need to combat the ... /// test xxxxx xxxxx foto xxx...
TRANSCRIPT
THE NETHERLANDSFocusing on
the long term
SiLLy SEASoN?us presidential elections
the role oF yiELDSand TRANSpARENcy
Kempen insight /// July 2016
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Kempen Insight, July 20162
table oF contentstable oF contents
4
‘There is no substitute for active investors who develop a deep understanding of businesses’/// interview with dominic barton,global managing director atmcKinsey & company
Quick visit to Edinburgh/// Meet the Kempen european small-cap team
Among professors/// inaugural speech of chief strategist – and professor –
roelof salomons in words and pictures
Looking right through real estate/// New modus operandi yields greater insight
Kempen Insight, July 2016 3
/// colophon
Juli 2016 ©Kempen Capital Management
Editorial addressKempen Capital Managementto: Secretariaat KCMPostbus 756661070 AR AmsterdamT + 31 20 348 [email protected]
collaboratorsPHOTOGRAPHY Johannes Abeling,Henrike Beukema, Getty, Mario Hooglander, Philip Jenster, Henk Veenstra, Laurence WinramTEXT Jos Leijen, Daniëlle Levendig,Bas Kooman, Stephanie Lewis, Lesa Sawahata
EditorsRuth van de Belt, Lars Dijkstra, Anja Corbijn van Willenswaard, Evert Waterlander, Charlotte Wilberts
Art direction/designHenrike Beukema
Kempen Capital Management is included in the register of the Netherlands Authority for the Financial Markets (Autoriteit Financiële Mark-ten) as manager of investment funds and as asset manager. This information may not be construed as an offer and provides insufficient basis for an investment decision.
Foreword
at the start of this year we anticipated a year of high
volatility and little direction on the financial markets. so
far, our predictions have proved to be highly accurate.
as ruth van de belt rightly notes in her column, we are
witnessing brexit upheaval in the united Kingdom and
presidential elections in the united states. the summer
promises to be anything but dull for news.
at Kempen capital management we are monitoring
current events closely, and as always we look beyond
our own national borders when it comes to economic
trends. Yet we also take a good look at the netherlands.
dominic barton, global managing director of mcKinsey
& company and one of the people behind Focusing
capital on the long term, says in our interview with
him: ‘the netherlands has a proud tradition of leader-
ship on long-term investing and incorporation of
environmental, social and governance.’ We are very
pleased that he is participating in shiFt to long-term
investing, the english-language newsroom
where you will find the latest research
and opinions on long-term investing.
someone else who intends to conduct a
lot of research into the long term and the
effects on investment is our chief stra-
tegist roelof salomons. he was
recently appointed professor of
investment theory and asset
management at the university
of groningen. this edition of
Kempen insight includes a
report on his inauguration in
pictures and words.
in short: together with you, we
remain alert to the short term and
set our sights on the long term.
i look forward to hearing your
comments and suggestions on
reading this insight.
Lars Dijkstra
Chief Investment Officer
If the price is right/// relevance of cost transparency for uK and dutch pension funds 16
Books that inspire/// as selected by evert Waterlander 19
Volatility on the horizon/// politics could cause turbulence 22
Column Ruth van de Belt/// us summer spectacle 24
8
What explains the low volatility anomaly’?
4 Kempen insight, July 2016
/// by Lesa saWahata Lphoto Johannes abeling
InterviewDominic Barton, Global Managing Director McKinsey & Company
‘We need to combat thegrowing short-term mindset’
As co-author of the seminal article ‘Focusing Capital on the Long Term’ (with Mark Wiseman), Dominic Barton of McKinsey & Company triggered the long-term investing discussion that is (slowly) gaining traction in global finance. In this Q & A interview, conducted with the editors of Kempen Insight, Dominic answers key questions regarding why – and how – the shift to longterm should be implemented, and how The Netherlands is already well-placed to drive the FCLT agenda.
in your opinion, what changes must be made in asset
management in the near future?
‘asset management has a critical role to play in reorienting
the investment value chain toward long-term value crea-
tion. First, asset owners and managers must reorient their
portfolios toward longer-term performance, looking to
asset classes and investments, like infrastructure, that
provide long-term value, but may take longer to see
returns.
Kempen Insight, July 2016 5
to support these changes, asset managers
should align compensation and perfor-
mance measurement with these longer
time horizons – such as gic’s (investment
corporation of the government of
singapore) policy to evaluate manager
bonuses on 5- and 10-year performance.
Furthermore, new benchmarks have a role
to play in encouraging asset managers to
take a longer view and encourage compa-
nies to adopt and showcase sustained value
creation plans. For example, the recent
creation of the s&p long term Value crea-
tion index –and the strong interest in using
the new benchmark – is a great step
forward.
Finally, asset managers must devote more
time and resources to engagement with
management teams and boards. there is
no substitute for active investors who
develop a deep understanding of busi-
nesses and promise support for long-term
value creation. 64% of asset managers say
their engagement with boards is increasing
– and this is an encouraging sign.’
What has been your motivation in
launching the Focusing capital on the
Long Term (FcLT) initiative?
‘along with our partners, mcKinsey helped
to launch the Fclt initiative because we
saw the growing costs of short-termism.
i had spent over a decade living and
working in east asia, where corporate and
investor timelines are far longer, and when i
returned to living in london, i was
surprised by how much pressure ceos felt
to demonstrate results in a matter of quar-
ters. We saw that this was destroying
economic value, diminishing shared pros-
perity among a broader set of stakeholders,
and undermining trust in capitalism in the
wake of the financial crisis.
the initiative was launched – along with
mark Wiseman from the canadian pension
plan investment board, larry Fink from
blackrock, cyrus mistry from tata and
andrew liveris from dow – because we
believed that the issue needed more public
attention, more rigorous analysis, and
concrete action plans to help investors,
executives, and boards combat the
growing short-term mindset.’
What is the role of Dutch institutional
investors (pension funds) in the long-
term debate?
‘the netherlands has a proud tradition of
leadership on long-term investing and
incorporation of environmental, social and
governance factors, and it is a hub of
leading pension players. For example, abp
‘We need to combat thegrowing short-term mindset’
the newsroom www.shiftto.org
facilitates the debate on long-term
investing. here you can find
articles, columns and research from
thought leaders from varied
background and ages.
/// tekst XXXXX XXXXX foto XXX XXXXXXXXXXX
Kempen Insight, July 20166
dominic barton and paul gerla, ceo of Kempen capital management.
Kcm recently became a partner of the Fclt-initiative that was founded
in 2013 by mcKinsey & company en the ccpib (canadian pension
plan investment board).
results, and what value sacrifices they are
willing to make to meet short-term targets.’
What do you find particularly important
and significant in such initiatives as FcLT
and www.shiftto.org ?
‘i am impressed by the breadth of interest
in these initiatives. despite the geographic
differences in business culture or regulation,
we find that short-termism is of concern
around the world. unlike many business
associations, these efforts have attracted an
incredibly diverse set of stakeholders across
geographies and industries– from mining to
consumer products and from hedge funds
to government officials.
in addition, i believe the practical orienta-
tion of these efforts is unique. While we are
interested in studying and diagnosing the
issue, we have also worked collaboratively
with members to create concrete action
plans to pilot new approaches within
investment funds, boards, and manage-
ment teams. We hope that Fclt will
continue to take this action-oriented
approach as we grow!’
on these topics?) and the tenor of corpora-
te-investor dialogue (e.g. are analyst calls
focused on minutiae over the next quarter
or truly strategic issues?). long-term health
measures such as quality of talent pipeline,
innovation rate, trust levels with key stake-
holders, and resilience also need to be iden-
tified for each company.
at a systemic level, we can measure long-
term investing by the proportion of cash
flow and profits going back to investment
(either in capital expenditure or r & d),
and unfortunately these numbers seem to
be falling. Finally, we continue to conduct
qualitative surveys of how much pressure
managers feel to demonstrate short-term
was recently ranked by the asset owner
disclosure project as the 4th best instituti-
onal investor in the world at managing
climate risk (and was by far the largest in
terms of assets among the top 10). another
good example is pggm’s active engage-
ment with the companies in its small-cap
equities portfolio on long-term strategic
topics. institutional investors elsewhere in
the world need to consider the relevance of
these approaches to their own strategies.’
How – and with what measurements –
can you determine when long-term
investing is a success?
‘long-term investing is a notoriously diffi-
cult outcome to measure. however, there
are several areas that are key indicators.
First, and foremost, we can look to invest-
ment returns for managers over horizons
and whether asset owners are meeting their
most fundamental long-term objectives
(e.g. can pension funds meet obligations
without taking undue risk?). similarly, we
can look at corporations and boards’ dedi-
cation of time and resources to long-term
strategy (e.g. how long are they spending
about dominic bartondominic barton is the global managing director of mcKinsey &
company. in his 27 years with the firm, barton has advised clients
in banking, consumer goods, high tech and industrial. dominic
leads mcKinsey’s work on the future of capitalism, long-term
value-creation and the role of business leadership in society, and is
the author of more than 80 articles on related topics. this includes
the article ‘Focusing capital on the long term’ (co-authored with
mark Wiseman) and which sparked the ongoing Fclt discussion.
amongst his many board and advisory positions, dominic is a
member of the canadian prime minister’s advisory committee on
the public service, a trustee of the brookings institution and a
member of the editorial board of shiFt to, long term investing.
‘Despite the geographic differences in business culture or regulation,
we find that short-termism is of concern
around the world’
Kempen Insight, July 2016 7
Karen mcgrath, Vivienne taylor, erika White, mike gray, tommy bryson,
martin stockner, Kathleen dewandeleer.
Mark McCullough (in-absentia).
SoLiD FoUNDATioNS, BRiGHT FUTUREhigh conviction. Quality companies. esg engagement. Kempen has been generating
alpha in european small-caps from edinburgh since 1997.
edinburgh castle
To cASTLE RocK Visiting the european small-cap team in edinburgh
Kempen Insight, July 20168
/// by Jos leiJen visual gettY
Low volatility equities yield a higher return
than might be expected based on their level
of risk. Analysts call this the low volatility
anomaly. Until recently, the explanation for
this discrepancy was chiefly sought in investor
and analyst behaviour. Yet interest rate risk
also plays a significant role, according to
investment strategist Ivo Kuiper at Kempen
Capital Management.
low volatility equities are equities that are
subject to relatively minor price fluctua-
tions, without excessive outliers. they
belong to low–risk sectors, such as utilities
and consumer staples. these companies
enjoy stable incomes and predictable earn-
ings. dutch examples include unilever and
ahold, or further afield nestlé and brewer
anheuser-busch inbev. solid companies.
Gambleas long ago as last century researchers
discovered that low volatility equities display
a better return than they ought to given the
relatively low risk involved. the reason for
this inexplicable outperformance was chiefly
sought in analyst and investor behaviour.
investors seek higher returns and conse-
quently tend to ignore low volatility equi-
ties. they prefer to gamble on earning a
high return and accept the risk that the
return may turn out lower. another expla-
nation is that analysts are over-optimistic
about high volatility equities.
these mechanisms probably do play a part,
but according to ivo Kuiper this is smaller
than has been assumed in the past.
Sensitive to interest ratesas cashflows and earnings for low volatility
equities are easy to predict, interest rates
are important to determining the cash
value, Kuiper explains. if interest rates fall,
the future earnings are worth more.
The role of interest rate
in addition to his job as an
investment strategist at
Kempen capital management,
Kuiper is a part-time researcher
at tilburg university. Kempen
capital management and the
university have worked together
since 2011. its master’s
students can complete their
degrees at Kempen capital
management. among other
things, Kuiper is conducting
research into the relationship
between low volatility equity
prices and interest rate trends.
interest rate risk partially explains outperformance by low volatility equities
9Kempen insight, July 2016
What is more important is that investors
take the interest rate effects on low volati-
lity equities into account in their investment
strategies, Kuiper says. “say that your
strategy involves your portfolio containing
one third equities, one third bonds and one
third other securities. in this case, you need
to be aware that low volatility equities
move more in line with bonds than other
equities do. You therefore hold a higher
interest rate risk in your portfolio.”’
Ivo Kuiper
Investment Strategist
play a role, but a smaller one than has
previously been assumed. We also see that
the reward for interest rate risk is relatively
high. Further research should reveal the
reason for this. We do not yet understand
everything.”
Cautionover the past few years, low volatility
equities have profited more from the
declining interest rates than other equities.
Kuiper predicts that low volatility equities
will underperform when interest rates rise.
as Kempen capital management expects
interest rates to rise in the long term, we
are cautious about recommending this
strategy at the moment.
if interest rates rise, these equities become
less interesting. this effect can be
compared to the value growth of bonds.
“the more easily earnings can be
predicted, the more sensitive the equities
are to interest rate trends. Yet if this is the
case, you should also expect to receive a
reward for the interest rate risk. after all, if
interest rates rise, the future earnings and
due dividends will be worth less in relative
terms. the research i have conducted
together with master’s student robbert
beilo demonstrates that this effect does
exist.”
the interest rate effect explains part of the
low volatility anomaly, but not all of it.
“the behaviour factors undoubtedly also
10 Kempen insight, July 2016
/// by roeloF salomons photo henK Veenstra
Predicting returns
On investment theory and asset management
noise in the data, the latest crazes.... in the short term, investment is speculation. in the long term, however, predictability can work in your favour, roelof salomons argues in his inaugural speech as professor of investment theory and asset management at the university of groningen.
Predicting returnsRector Magnificus, esteemed guests, each year, i play a variant of the beauty contest as described in such lively terms by John
maynard Keynes (1936) with my students. the idea is to get everyone in the lecture theatre
to write down a number between 0 and 100, whereby the winner is the player with the
number closest to 2/3 of the average. as all the players possess all the information and are
completely rational, there is only one ‘correct’ number: 0. unfortunately, it doesn’t work like
that. most players start by randomly choosing a number from the set (50) and then think one
step ahead (33). step 2 thinkers end up at 22, while those who think one step further name
the number 15. and each year i have a few students (mostly those with quantitative back-
grounds) who then go through all the steps and come up with 0.
the game shows all too clearly that it’s not about who is ‘pretty’ but about the expectation of
what the consensus considers to be ‘pretty’. the same goes for modern investment practice.
it is not so much about the predictability of earnings, growth and discount rates, but rather
about ‘predicting’ what others expect of them: it’s all about ‘predicting’ market psychology.
in this case investment becomes speculation, and the short term cannot be predicted.
Noise dominates the short termthe latter becomes clear if we analyse time series of financial assets over different horizons.
smith (1924) and siegel (1998) demonstrated many years ago that investors require a great
deal of patience. in the long term, equities outperform bonds and there is a lower risk of a
negative return. You can depict this graphically using moving average yields as shown in
figure 1.Yet there is more. the longer the investment horizon, the more ‘normal’ the distribu-
tion of the returns. in the short term, noise has the upper hand and predictions are difficult.
the opposite applies to the long term.
* this article is a highly-abridged version of ‘beyond the noise – on investment theory, towards long-term asset management’, the inaugural speech given by roelof salomons on 14 June 2016 on acceptance of the professorship of investment theory and asset management.
read the unabridged inaugural lecture on www.kempen.nl
11Kempen insight, July 2016
Kempen Insight, July 201612
Figure 1Moving average yields
-100
-50
0
50
100%
1872 1892 1912 1932 1952 1972 1992 2012-10
-5
0
5
10
15
20%
1881 1901 1621 1941 1961 1981 2001 2011
the top graphs show the real total returns (adjusted for inflation and includingdividends) on equities over 1-year and 10-year periods. the data periodis 1871 – 2015.the monthly data for the s&p500 index, a market capitalisation equity index,come from shiller and standard & poor’s.the bond market data are from global Financial data and bloomberg.
sources: shiller and standard & poor’s
Kempen Insight, July 2016 13
0
10
20
30
50
40
1872 1892 1912 1932 1952 1972 1992 2012
Predicting returns over the last two decades it has become clear that returns can be predicted to a certain extent based on valuation
criteria. campbell and nobel prize winner shiller (1998, 2001) were the first to demonstrate this. in my own doctoral
thesis (salomons, 2005 - ed.), i show that the value - ranking prices based on underlying fundamental indicators such
as earnings (Figure 2) - at the time of purchase is a sound indicator of future returns.
the predictability derives from the ‘reversion to trend’ in the valuation variables. if p/e ratios revert to trend, this may
be due to changes to the price, the earnings or a combination of the two. this is worth remembering. as a lecturer
this is when i say to my students: “i would make a note of this.”
high valuations go hand-in-hand with low expected returns and vice versa. there is predictive value in the long term.
there is no relationship in the short term between current valuations and future earnings or future returns. in the
short term there is noise. Yet this relationship does exist in the long term, but only for future returns. Valuations tell us
nothing about future earnings. p/e ratios revert to trend, but it is the prices that prompt that reversion to trend. so if
as an investor you cherish the hope that although current valuations are on the high side this means that earnings
will grow more quickly in future, i’m afraid you are hoping in vain. Figure 3 demonstrates this.
Improved investment within marketsa long-term investment horizon therefore helps us to predict the returns on a market index. it is also beneficial to
seeking returns within asset classes, in the cross-section. i will quickly lead you through the literature on the subject.
the capital asset pricing model (capm) was created in the 1960s. in it a single factor, the beta of the equity, or the
correlation between the equity and the general equity index, determines the risk and expected return. by the time i
graduated in the late 1990s, two additional factors were generally accepted. nobel prize winner Fama and French
(1993) described how small companies (size, measured by market capitalisation, small minus big or smb) and cheap
companies (value, measured as book-to-market value, high minus low or hml) also explain the cross-section of
returns. the momentum (momentum, measured as the difference between returns over the past year, winners minus
losers or Wml) effect of Jegadeesh and titman (1993) and carhart (1997) was added later.
Figure 2price/earnings (p/E) ratio
the graph depicts the cape (cyclically-adjusted price earnings) for the s&p500. here, prices are divided by the reported earnings over the past ten years, filtering out the effect of the economic cycle on the valuations. the data period is 1881 – 2015. the monthly data for the s&p500 index, a market capitalisation equity index.
source: shiller
Kempen Insight, July 201614
these are the factors about which there is a general consensus. the academic and financial worlds have not stood
still since then. in a recent article, harvey, liu and Zhu (2015) discuss the more than 300 different factors that have
since been tested and are supposed to lead to improved investment results. Yet the statistical relevance of a positive
result needs to be viewed with some scepticism, especially if several strategies are tested simultaneously.
in Figure 1 you saw that investors in equities need a great deal of patience. the same applies to the underlying
factors in the equity market. there are long periods in which factors do not work. time is a restrictive factor.
Predictable additional returnsby introducing the correct long-term exposure within their portfolios, investors can therefore earn a higher than
average return. Yet, as is the case with equity risk premiums, these premiums are not stable. this immediately begs
the question of whether it is possible to predict these premiums. in my humble opinion, the answer is: yes, although
research into this is still in its infancy.
the top graphs show the relationship between the cape (cyclically-adjusted price earnings) on the x-axis and the correspond-ing 1-year and 10-year real total return (adjusted for inflation and including dividends) on the y-axis.
the bottom graphs depict the relationship between the cape and the corre-sponding 1-year and 10-year earnings growth.
the data period is 1881 – 2015.
Figure 3Relationship between current valuations and future returns
sources: shiller and standard & poor’s
-100
-50
0
50
100%
0 5 10 15 20 25 30 35 40 45 50
-100
-50
0
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0 5 10 15 20 25 30 35 40 45 50
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0
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0 5 10 15 20 25 30 35 40 45 50
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0 5 10 15 20 25 30 35 40 45 50
Kempen Insight, July 2016 15
allow me to conduct a thought experiment. if the p/e ratio of the equity index is a sound predictor of the
future return on that index, is the relative p/e ratio of a factor a sound predictor of the future return on that
factor? if cheap/value equities are valued as extremely cheap versus expensive/growth equities, is there then a
greater chance of value performing better in future? and can small caps become so expensive that the size
factor yields less than the historical average? i think so.
Key question in the short termas we know from the theory that returns at market level and within markets are predictable in the long term
and we know that the liabilities of institutional investors are of a long-term nature, why is there then so much
emphasis on the short term? or to go back to Keynes’ beauty contest: why is there such a focus on the latest
psychological craze?
i want to make the case for reverting to investment based on fundamental analysis and placing less emphasis
on indices. a case for the long term and for investors in their role as providers of capital. there is also the
aspect of social relevance here. traditional portfolio theory has brought us many wonderful things. Yet if you
want to exaggerate you could say that when major institutional investors allow themselves to be guided
completely by the index they then surpass their role as providers of capital. investment is more than just
numbers in a spreadsheet.
I have said.
roelof salomons, prior to this inaugural lecture, in the senate chamber at the university of groningen.
Kempen Insight, July 201616
If the price is rightJohan Cras is ideally placed to discuss the strengths of the UK and Dutch ‘cultures’ in his position as Managing Director of Kempen’s London based business given his experience working in both financial markets. In this Q&A, he offers his perspectives on why cost transparency – an important and specific focus of Dutch funds – should matter to the UK.
Johan cras on cost transparency
Johan Cras stresses the importance of cost transparency during an interview with PMI-tv.
Kempen Insight, July 2016 17
/// by lesa sawahata photo PMI/tv
what In your oPInIon are the bIg dIfferenCes
between uK and dutCh PensIon funds?
‘what I like about working in the uK pension market is this
notion that people invest with ambition. It’s the ambition to
effectively give a pension to members which is geared towards
a real income rather than a nominal income - and the diffe-
rence between the two is the inflation rate. and although infla-
tion is very low at the moment, we do believe that in the longer
term it has an enormous impact on what people can actually
spend their pension on. the longer term focus on investments
provides greater opportunities to realise a
pension with real value. uK pension
schemes are much more focused on provi-
ding that real income than dutch pension
schemes. so that would be a plus for the
uK.’
and In the netherlands?
‘In the netherlands, people are more
geared towards answering the question
‘how’- how we do things rather than a single sided focus on
what the outcome is. Investment is a profession which is pretty
difficult in terms of garanteeing outcomes, and so in the
netherlands we’ve gotten used to defining prudency as process
rather than just outcome. from my point of view we would
encourage uK schemes to spend a bit more time on finding out
how things are being done rather than just focusing on the
outcome.
another thing where I think dutch funds have really progressed
is this cost transparency issue. a lot of effort is being made by
the industry to make sure that people understand what costs
are being paid to whom, and with what ambition in mind.’
so why Is Cost transParenCy relevant?
‘ultimately it’s about good value for money. are we paying a
‘fair’ amount of money given the return ambitions that we have
as a scheme?
so the first element is to understand whether what you’re
paying is a fair price. this is not a game about ‘the good, the
bad and the ugly’ – this is about whether you’re paying the
right price, given your investment ambitions.
the second element is that every pensioner pays premiums for
his pension, and I think there’s a fiduciary duty - not only for
the providers but also for the trustees - to
understand what specific amount of money,
given those premiums, is paid to the different
providers. once you understand what’s being
provided you can also start to judge whether
what you’re paying is the right price for the
service provided and potentially make some
adjustments there. It seems prudent that the
ultimate owners of the assets - the members,
and the trustees on their behalf - know who,
how and where money being is made from these assets. this is
one of the few industries where customers are not allowed to
know what the price of their services is.’
what should the uK be doIng to start organIsIng
Itself for greater Cost transParenCy?
‘first start with raising the question; make sure that every time
you meet with the provider you raise the question about fees.
and then the second stage is to ensure that you understand
what you hear back - and if you don’t, raise the next question.
the final question should be ‘Can you confirm that there are no
other costs involved? that there are no costs or fees being
charged against these assets?
‘We feel very strongly about transparency’
in raising questions you make it clear to the provider that this is
an issue which is important and on your agenda; that you truly
want to understand what’s happening, who’s earning what for
what purpose and what the benefit might be. as mentioned
earlier it’s not about the good, the bad or the ugly, it’s under-
standing whether given your investment ambitions, you pay the
right price for the services you’re getting.’
is there practical guidance You proVide to
pension schemes to address this challenge?
‘at Kempen we have developed a document that we refer to as
a ‘heath check’, a document that trustees find very useful. the
objectives of the ‘health check’ is to draw out key points of
note – looking at all services provided and both the implicit and
explicit costs/charges, then to present what these findings mean
for the pension scheme and suggest areas for improvement.
the benefits of this approach is that the scheme, in a timely
way, gains insight in their current approach to investments, it
enhances their understanding of what’s being paid for thus
improving transparency, they will see their costs being
compared to the existing investment strategy and compared to
alternatives, putting them in a better position to evaluate and in
some cases rethink their strategy or the fees paid.’
anY Further adVice about hoW to get beYond the
current challenges around cost transparencY?
‘there’s relatively little availability of cost transparency informa-
tion at the moment, and we would urge everybody – together
- to raise questions around that.
one of the things we would encourage uK plans to do is to take
this on in collaboration with each other; form a group of people
who together will start raising those questions as an industry,
rather than as an individual scheme. We would certainly support
an initiative from uK schemes to collaborate on cost transpa-
rency. We feel very strongly about transparency.’
Kempen Insight, July 201618
pensionsmanagementinstitute
the pensions management
institute (pmi) is the uK’s largest
and most recognisable professional
body for employee benefit and
retirement savings professionals,
supporting over 6,500 members.
pmi have partnered with firms in
sectors relevant for the industry to
provide knowledge and thought
leadership in their respective areas.
Kempen is the pmi expert partner
in the area of Fiduciary manage-
ment. pmi recently interviewed
Johan cras, managing director at
Kempen, to discuss the main chal-
lenges for uK pension schemes,
preparing the uK for cost transpar-
ency and the future of fiduciary
management.
www.pensions-pmi.org.uk
Kempen Insight, July 2016 19
Banks as the Achilles heel of the economy
a former governor of the bank of
england who chooses the title ‘the end
of alchemy’ for his book on money, the
role of the banking system and how
our economic future depends on these
is guaranteed to capture our attention. don’t expect any
memoirs: this is an experienced expert’s reflections on the
financial system. on the basis of long-term economic trends,
King concludes that banks are not fulfilling their role of drivers
of economic growth. banks earn money by creating money
through the confidence placed in them: alchemy. Yet this acti-
vity makes banks the achilles heel of our economy at times of
crisis. as a result, capitalism experiences frequent and long
periods of economic stagnation. central banks can steer the
economy less well than they think at such times. Just look at the
persisting moderate economic growth since 2008, in spite of
large-scale, global quantitative easing. We need a new vision for
the role of banks. like other policymakers, King also points to
measures that allot a central role to maintaining confidence in
the banking system. For commercial banks, that may well be
more important than being an alchemist.
Title: The end of AlchemyAuthor: Mervyn KingPublisher: W.W. Norton & Company
ISBN: 978-0-393-24702-2
The excessive power of short-term investors
how is it possible that a deliberate stra-
tegy to increase shareholder value over
the past few decades has gone hand-in-
hand with lower economic growth rates
in the Western world? masouros demon-
strates that changes to corporate law
aimed at encouraging the free movement
of capital have simultaneously – and partly
unintentionally – increased the power base
of investors with a short-term focus. this book posits a post-Key-
nesian theory: these investors are ensuring that these companies
have less capital available for investment, which is in turn affec-
ting future growth. masouros illustrates his theory using several
case studies and international comparisons.
amendments to corporate law that give greater weight to long-
term interests could play a role in achieving economic growth.
take situations involving weighing up stakeholders interests to the
disadvantage of shareholders, or moving away from the principle
of equality between shareholders. after all, the interests of short-
term investors differ from those of loyal long-term investors.
Title: Corporate law and economic stagnationAuthor: Pavlos E, MasourosPublisher: Eleven International PublishingISBN: 978 – 94-90947-8
booKsto inspire
Evert Waterlander is Director Client Solutions at Kempen Capital Management. He selects for Kempen Insight books on [email protected]
19
A behind-the-scenes look at pensions
this is the fourth book by canadian
pension guru Keith ambachtsheer in
barely twenty years. this time he
reviews trends in the pension sector in
different countries since 2008. the
book provides evidence of the high
dynamics in this sector and of the tough challenge of maintai-
ning an affordable and reliable pension system. For pension
industry leaders, the trick is to apply an integrated strategy to
the pension system, the governance model and their invest-
ment convictions. ambachtsheer discusses several aspects of
each of these areas. sometimes using academic research, some-
times by taking a look behind the scenes at a prestigious
pension fund. each chapter closes with practical and feasible
policy options which often merit classification as best practices.
Title: The Future of Pension ManagementAuthor: Keith P AmbachtsheerPublisher: WileyISBN: 978-1-119-19103-2
Kempen insight, July 2016
/// by Jos leiJen visual henriKe beuKema
20
‘there are several different methods for
deciding which property funds to invest in,’
head of real estate matthijs storm explains.
‘You can allow yourself to be guided by
macro market data, or you can examine the
underlying information on the property
investment funds and their properties. We
apply the latter method, bottom-up.’
Kempen capital management real estate has
developed a digital platform containing
information on about 300 listed property
investment funds in which it can potentially
invest. the data are derived from various
sources, such as information provided by the
companies themselves, Kempens own
research and information purchased from
specialist providers.
Chess computerour proprietary data infrastructure processes
the information and supports the deci-
sion-making. ‘You can compare it to a chess
computer,’ storm says. ‘it is important that
it is properly programmed. With the help of
the team we worked out different scenarios
and inputted these into the platform. this is
how we achieve data-based property invest-
ment, as rationally as possible.’
apart from the platform itself, the information
it contains also needs to be reliable. ‘We have
selected our sources with great care. From
time to time we test their reliability, for instance
by personally visiting a shopping centre that
our source tells us has high-quality tenants.
this allows us to obtain an accurate picture.’
Identifying undervalued fundsthe bottom-up strategy applied by storm
and his team also enables them to identify
undervalued investment funds. ‘there are
different types of investors in the real estate
market, which results in inefficiencies. We
assess the ratio with respect to the price and
quality of the real estate. For example, we
examine the debt position and rental income.
this is how we decide whether or not to
select a property investment fund.’
this strategy yields benefits for Kempen & co
clients. to start with, there is the sound return
(January 2012 – april 2016, compared to the
Ftse epra nareit deVeloped europe
indeX). ‘We have applied our strategy for
four and a half years now, the past eighteen
months as a global strategy,’ storm continues.
‘each year we have succeeded in earning an
above-average return. on average, the return
is 200 basis points higher than the bench-
mark.’ (the value of your investment may
fluctuate. past performance provides no
guarantee for the future.)
Transparencyanother benefit is that Kempen & co can
very easily explain the reasons behind invest-
ment decisions. ‘the real estate market is by
its very nature highly opaque. We provide
complete transparency about what we do
and why we do it. We can show clients the
See through real estateKempen Capital Management has a unique system for determining the value and quality of property companies. This enables the Real Estate team to take well-founded investment decisions. Clients consequently obtain greater insight into their investments.
the digital platform contains information on about 300 listed property investment funds.
/// tekst XXXXX XXXXX foto XXX XXXXXXXXXXX
Kempen Insight, July 2016 21
underlying data and explain how we reached
our decision.’
client can also stipulate specifications for
their investments. ‘For instance, pension
funds want to know the co2 emissions for
their portfolio. We hold all the data relating
to buildings and property companies and
their co2 footprint. We can provide all kind
of detailed information on the sustainability
of the investments.’
Accountabilityanother issue is that pension funds have to
answer to their regulatory authorities in rela-
tion to various aspects of their investments,
such as exposure to debt. ‘real estate invest-
ment funds finance part of their assets with
debt capital. We know the financial leverage
of each fund in which we invest.
‘it’s just like when you used to go to a travel
agent and you sat staring at the rear of the
computer screen waiting to be told how
much your holiday was going to cost. nowa-
days, you arrange your holiday yourself on
booking.com and other websites. We offer
our clients the same level of transparency. We
arrange everything for them, but they have
precise insight into what we do.’
Best-possible combinationdoes this mean there is no longer any room
for instinct and experience in investment? ‘of
course there is,’ storm insists. ‘We cannot put
everything in terms of data. What does the
shopping centre of the future look like? and
what does this mean for today’s shopping
centres? ultimately, structured decisions
come down to the best-possible combination
of objective information and instinct. i think
we are very good at that. We believe the
strongest combination is the chess computer
and human input.’
Matthijs Storm
Head of Real Estate
4,5yrKE
MPE
N E
URO
PEA
N P
ROPE
RTY
STRA
TEG
Y T
RA
CK
REC
OR
D*
2012
201
3
20
14
2
015
2016
* Source: KCM June 2016
CO2 COMMUTING DISTANCE
MAXIMUM CEILINGGOVERNANCE
‘We can provide all kind of detailed information on the sustainability of the
investments’
Kempen Insight, July 201622
Valuations form the basis for investment
decisions taken by investors with a long-
term outlook. With valuations above-average levels for several years now,
investment strategist Marius Bakker argues in favour of selective
risk-taking.
For some time now, financial market valua-
tions have been significantly higher than
the long-term (10 years or more) average
across virtually the whole investment spec-
trum. We do not view this as a stable situa-
tion in the long term and anticipate that
valuations will be lower. during this period,
we are being cautious about taking risk and
believe capital retention to be at least as
important as the return on capital.
Yields are at historically low levels thanks to
the repeated intervention of central banks.
an increasingly large portion of the
outstanding sovereign debt offers no yield
at all, and sometimes even a negative one.
this has driven investors towards riskier
investment classes, such as equities and
credits, blowing valuations up even further.
credit spreads are the most obvious
example from the past few months. the
ecb’s latest package of stimulatory meas-
ures – they are now also buying corporate
bonds - has placed further pressure on
credit spreads in the european market.
hence lending to large corporations is not
rewarded in terms of risk. in our opinion,
investors are no longer sufficiently compen-
sated for the higher credit risk compared to
government bonds.
Emerging markets We see selective opportunities for the
equity markets, chiefly at regional level.
after a volatile first quarter, the stock-
market has calmed down again some-
what. While sentiment was recovering,
however, prices once again started to rise.
although valuations became slightly more
attractive during the turbulent start to the
year, we are seeing them increase again
now that the market is calming down
again.
For some time now, we have been selective
about risk-taking in those markets in which
the reward for this is marginal. moreover,
our fundamentals that form the basis for
our expected returns deteriorated in the
first quarter of 2016. corporate results and
margins are being squeezed in all the major
economies. on the other hand, we have
seen yields fall further, especially in the
eurozone. We believe that premiums on
european equities still offer sufficient
compensation for the higher risk compared
to government bonds. emerging market
equities are the most attractive option in
the equity universe with respect to valua-
tion, but at the same time they are the risk-
iest. in spite of this, in the wake of years of
Volatility on the horizon
Kempen Insight, July 2016 23
%
10
8
6
4
2
021 3 4 5 6 7 8 9 10 11 %
Exp
ecte
d re
turn
Required return
EMU BONDEUR CREDITS
US GOVERNMENT BONDSUS EQUITY
HIGH YIELD
EU EQUITY
EM EQUITY
economic headwinds, we currently see
the greatest opportunities for growth in
emerging markets. Yet the course of the
recovery depends on the growth of the
chinese economy and the upturn in
commodity prices: two themes about
which we are not particularly positive.
Political unrestthe shrinking pool of attractive options
within the usual investment universe makes
it interesting to look at alternatives. one
important aspect in relation to alternatives
is their low correlation to other positions.
the diversification effects can cut the port-
folio’s total risk without significantly redu-
cing the total expected return. at current,
historically-low yields, the opportunity
costs (what is the value/what are the costs
of the best non-selected alternative) for
diversification are also lower. We only need
to relinquish a marginal return if we include
alternatives in the portfolio.
the market is highly likely to become more
volatile in the second half of this year.
political trends in both europe and the us
are dominating the markets. at the same
time, economic growth in the developed
world is displaying the first signs of fatigue,
which raises doubts as to the interest rate
path to be pursued by central banks. as
each of these factors has the potential to
shake up the markets considerably, our risk
attitude remains neutral for the time
being.
Marius Bakker
Investment Strategist
expected vs required return
Source: Kempen Capital Management - 31 May 2016
the solid line shows where the required return is equal to the expected return. the dotted line shows that the slope of the line connecting expected equity and bondreturns (the risk premium) is still the same, but that expected returns are lower.
WhY Valuations matter
the framework we use at Kempen capital management for valuing individual asset
classes is based on the most important assessment we make as an asset manager: the
trade-off between risk and return. the return on an investment needs to provide
sufficient compensation for the relevant risks we run. We expect the market to price
investments correctly in the long term and therefore offer a realistic reward for risk.
if the expected return on an investment is too low in relation to the probability of the
invested capital not growing or even incurring a partial loss, we view that investment
as unattractive. in our opinion, an investment class is valued neutrally when the
expected return is equal to the return we require.
Fluctuations in economic trends or market sentiment can cause markets to deviate
for short or longer periods from what we view as a neutral valuation. Yet when the
investment horizon is long enough, we expect the valuation of an investment to revert
to the neutral zone. although these fluctuations may be the main drivers for return
in the case of a shorter investment horizon, valuations are the dominant factor when
we examine the long term.
24 Kempen insight, July 2016
Kempen Insight, July 2016 25
/// visual philip Jenster
US spectacle with repercussions
summer is usually the silly season for
news. Yet this summer proves to be
anything but dull. We have the us
political spectacle to entertain us.
donald trump and hillary clinton are
expected to battle it out for the key to
the White house on 8 november.
trump is like a bull in a china shop. he
couldn’t care less about the unwritten
rules of conducting a campaign,
adopts politically incorrect stances
and is not afraid to pick a fight with
everything and everyone. in doing so,
against the expectations of the elite,
he knows that he appeals to a section
of us society. he is harnessing the
anger and frustration felt by part of
the population and convincing them
that someone is finally listening to
them, whereas they often feel the
ruling elite fails to take them seriously.
this is an issue that has long been a
problem in europe.
this is an indication that the populism
in the us will not simply go away.
even if trump fails to win the us presi-
dential elections (as we currently
assume), the phenomenon is here to
stay as it is has deeper economic
causes. over the past decade, income
inequality in the us has increased
further. the average household
income has fallen, partly due to job
losses in industry. these job losses can
in turn partly be attributed to us
trade policy, for example with china.
it is no coincidence that trump
strongly opposes free trade agree-
ments. the changing political climate
has also prompted clinton to reverse
her support for the trans-pacific part-
nership. greater protectionism, which
cannot be ruled out under either
trump or clinton, is bad news for
multinationals that rely on internati-
onal trade.
Yet the us presidential elections not
only have a high entertainment factor,
they are also important from an invest-
ment perspective. What will the political
manifestos look like? this, and therefore
the impact on individual asset classes,
should become clear over the coming
months. one thing is certain: it will be a
politically hot summer on the other side
of the atlantic.
Ruth van de Belt
Investment Strategist