Andrew Sheen talks to Justus van Halewijn about how the Blue Sky Group is surviving the credit crunch
Andrew Sheen: How has Blue Sky Group been affected by the financial crisis?
Justus van Halewijn: Well, as a company, indirectly. We work for the pension funds, which have of course been affected, so it gets back to us.
There are two main issues here. The first is what’s happening on the financial markets – equities are down, interest rates are down, and that has led to much lower solvency rates, and the second, which is more directly related to us, is that there was a lot to do about counterparty risk.
As a pension fund you have to deal with banks to hedge currencies, buy interest rate swaps and buy equity protection through equity options, so you do a lot of business with investment banks. When the crisis was going on, especially in October, we were very busy taking care of all the counterparty risks.
We’re now working on the outlook for 2009. The big thing there is that it will be a bad year, economically speaking, and the question is how long things will take to recover. That’s our main focus for this year – how bad will the credit crunch be?
Andrew Sheen: The Blue Sky Group seems to be a small team and you outsource a lot on the investment side – could you tell me the rationale behind that?
Justus van Halewijn: We outsource everything – we don’t invest in equities, bonds or real estate ourselves. That’s one of our key themes, and we’re happy with that.
It means we’re flexible. If we think, for example, high yield bonds are no longer attractive and we want to lower our allocation, then it can be difficult to do if you have an in-house team. We think that gives us an advantage – it’s easier for us to say ‘we’re stopping investing in this asset class’.
Andrew Sheen: So it’s more like a dynamic asset allocation strategy?
Justus van Halewijn: Yes, that’s an advantage but on the other side, we realised there are some disadvantages, mainly related to alternative assets, because they take a lot of effort.
We’re looking now at private equity and commodities and were already long term investors in real estate, high yield bonds, EMD [emerging market debt], direct real estate and others.
However, we don’t have any investments in hedge funds – that’s important to note. We’re not completely negative about it as an asset class, it can be an interesting diversifier, but we weren’t [totally] convinced [by it].
Hedge fund replication strategies attracted a lot of attention last year. We found that in a wide range of hedge funds there’s a lot of beta in it, and we are convinced you shouldn’t do that through hedge funds. If you do it yourself, you pay less and then, if you find a hedge fund that is a true alpha source, then it could be of interest. However, those types of funds are difficult to find.
We’re a strong believer in alternatives and we think they’re important in a portfolio, but we see it as alternative beta. We do have some active mandates in equities and fixed income, but we won’t be a strong mover in that area. We make a clear distinction between alternative beta and real alpha sources.
Andrew Sheen: You were one of the first European funds to invest in 130/30 strategies. Why? What was it about that as an asset class that was attractive?
Justus van Halewijn: We do invest in 130/30 strategies as of August 2006. We don’t see it as a separate asset class as it’s implemented within the equities.
The advantage of hedge funds is they have more room to manoeuvre – and we support that idea. So investing in 130/30 supports that basic concept of giving an asset manager more space to manoeuvre and to short equities. That was the idea to start 130/30 within the equity portfolio – to give the equity manager more room to move around.
Andrew Sheen: Before Christmas, APG said it was going to expand its asset management business and capabilities and open up to new clients. Is that something that would interest Blue Sky Group?
Justus van Halewijn: Yes – we’re open to new clients and acquired several new clients over the last couple of years. We focus on medium to large sized Dutch pension funds, although we are also asset manager for KLM UK – the British part of KLM.
Andrew Sheen: What do you see as the future for fiduciary management? Will it grow in popularity?
Justus van Halewijn: Yes, I think so. One thing you see, and it has been accelerated by what’s happening in the markets, is that smaller pension funds and smaller organisations are having a difficult time. The FTK regulation requires pension funds to do more homework, and everybody has realised that maybe it’s asking too much from the smaller funds, so you see the number of funds decreasing.
It’s quite interesting – there are a lot of Dutch players offering fiduciary management and we at Blue Sky Group do it. There’s a lot of competition, and I think that will increase in the coming years. It’s an interesting time and we, as Blue Sky Group, want to be part of that.
Andrew Sheen: Cross border schemes – everyone seems to say ‘it’s coming soon, but not yet’. Do you think we’ll ever see true cross border schemes, or is going to be primarily asset pooling, or will it take some other form?
Justus van Halewijn: I don’t see true cross border schemes coming in the short term, despite the European Union’s support – but asset pooling is already going on.
EU countries are very different in terms of pensions so there will need to be different arrangements for each country. That’s another reason why we’re saying we don’t have any ambitions to go abroad and offer our services in Belgium or wherever, because it’s a completely different market.
Andrew Sheen: What do you see happening in the industry over the next year?
Justus van Halewijn: If you start with the financial markets, we hope to see some kind of recovery at the end of this year, or at least next year. That will of course lead to improved solvency rates for pension funds, which will help solve the biggest problems. Another thing is that if you look at the pension funds in the Netherlands it’s a different market. The smaller funds will disappear – that’s important to recognise.
The DB system will be tested. I hope it won’t cause it to close and that we’ll keep the DB system in the Netherlands. Some time there will be a recovery on the financial markets and the big question for the boards of trustees is how much will they invest in equities or real estate, versus government bonds. We will want to advise them on that.
For our clients at least, there is also a big discussion going on about risk profiles – what is the right allocation? That’s a tough discussion and there are no clear answers for that – every board of trustees has to decide for themselves.
Andrew Sheen: What is your view on socially responsible investment (SRI)?
Justus van Halewijn: It’s not influenced by what has happened. We think it’s a topic that a board of trustees has to decide on for its own fund, and there are different opinions, even across the three KLM funds.
It is something a fund does for the long term, and we’re taking the first steps now. We’re not the first mover in this respect, clearly not, but we want to go on with it, so its one of the important topics we have on the agenda.
One other issue which is also one of our basic philosophies is integral balance sheet management. We from the investment department work very closely with the actuaries, doing asset liability modelling (ALM) for the clients we have, looking at the risk on the balance sheet. We think that’s the most important thing for the pension fund’s board of trustees to decide – what risks do they have in the balance sheet of the pension fund? That should be their first concern, and it’s being addressed now because of the low solvency rates.
About the Blue Sky Group
Blue Sky Group is a fiduciary manager formed in 1999 and renamed in 2001 to service the assets of the KLM pension funds.
Blue Sky Group’s clients include the three Dutch KLM pension funds, BP Netherlands, Alcatel-Lucent Technologies, Corporate Express, OPG, and the industry-wide pension fund for the shoe, leather and leatherwear industry.
It has asset under management of approximately €10.5bn, serves 70,000 members and is wholly owned by the three KLM pension funds.
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