The way we invest capital is based on logic and made up of a number of steps. In a nutshell, the first step is an extensive ALM (Asset Liability Model) assessment. This assessment sees us take stock of a pension fund’s preferences in terms of the targeted returns and their risk appetite. We also look at the fund’s total capital and pension commitments. With all that information in hand, we start our calculations based on very different scenarios, ranging from very positive to very negative. Thinking in terms of scenarios is an essential aspect of our approach, prompted by the fact that financial markets just happen to be very volatile. And because we cannot rely on futurists’ crystal balls.
Based on all these calculations, we answer three questions for a fund: whether they can link their pensions to inflation; whether they will have to change the pension premiums over the coming years, and if so, by how much; and what would be the best possible investment strategy for them. Based partly on our investment principles and experience, and from a shared vision on the global economy that we formulate together with the fund.
Next, we put together the best possible and a responsible investment portfolio, selecting investments from a wide range of categories, whereby we do not limit ourselves to shares, bonds, and real estate, but also invest in commodities, private equity, infrastructure, etc. In both established and emerging markets. The basic idea is that a broad spread over different investment categories and geographical regions helps improve the risk/reward ratio. The resulting investment portfolio will be different for every pension fund, because requirements, preferences, and investment needs are never the same.
Trust in our all-in approach
We at APG work based on a ‘fiduciary’ model. This means that we follow the strategy we committed to. First of all, serve pension funds with advice on how best to invest their capital, ensuring that they are always able to meet their obligations towards their participants and retirees without being exposed to major risks. And secondly, it means that the pension funds can entrust all their investment-related activities to us. We advise them on which investment mix (shares, bonds, real estate, or other investment categories) is the best fit for their goals. While we manage most of the investment portfolios ourselves, we do engage external investment managers for investments in specific markets or geographical regions.
Our fiduciary approach stands out for the unique way in which we keep the three crucial roles in the investment process strictly separate. Giving independent investment advice to our customers, investing pension capital, and managing risk are the three roles for which we have set up three separate dedicated departments, which operate entirely independently from each other. This way of working makes sure that interests never intermingle, keeps the investment strategy transparent and pure, and empowers us to cater exactly to our customers’ goals.
Our unique fiduciary approach ensures that we maintain a clear overall view of and control over the investments. And it enables us to intervene quickly as and when necessary. This way, we are able to cater to our customers’ goals to the maximum degree possible. And when we say customers, we not only mean the pension funds, but also, and perhaps more importantly, the people these pension funds work for. The ultimate aim is for them to have peace of mind in the knowledge that their pension is in safe hands, both today and in the future.
A sensible approach to risk
Every investor knows that returns and risk go hand in hand. When you want returns, you need to be willing to take responsible and controlled risk.
To identify risks in time and control them as best as possible, APG goes by the ‘Three Lines of Defense’ model, a tried-and-tested method for optimum risk management. Working based on this model means that APG has divided all risk monitoring duties and responsibilities over three successive ‘lines of defense’.
The first line of defense in risk monitoring is made up of our investors, who are responsible for recognizing and controlling risks. The second line of defense is made up of risk managers who autonomously (and independently from the first line of defense) bolster APG’s risk management, set and evaluate risk management guidelines, and work on methods and techniques for effective risk management and control. And the third line of defense is our internal audit department, which oversees the quality and effectiveness of our risk management practices.
These three lines of defense work like safety nets that jointly make sure that risks are kept under control. It involves a range of different specialists, including investors, advisors, risk managers, compliance officers, and internal auditors, who assess from their respective roles and based on their respective expertise how we are handling risks and how we may be able to further improve our risk management. This is how we maintain a balance between responsible risk management and healthy and sustainable investment returns.