DerivativesMarkets: Dutch giants: Less long end, more inflation demand?
Dutch pension funds ABP and PGGM both recently reported their quarterly results. Cover ratios at both are rising nicely but ABP’s new strategic portfolio catches the eye. Mark Ramsden asks if it points to less demand for long-dated bonds and more for inflation-linked assets.
|A version of this article first appeared in Total Derivatives.
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ABP is the largest Dutch pension fund, with capital of €209 billion. Its new strategic investment portfolio implies significant changes after ABP achieved a 133% cover ratio at the end of the fourth quarter. ABP asset allocation and research chief investment officer Tom Steenkamp says that, over the latter part of 2006, ABP’s new investment policy had led to a big rise in the duration of ABP’s strategic portfolio. Duration is now up at around eight years, from five years previously. Moreover ABP has lengthened the duration of its fixed-income portfolio chiefly through swaps.
Steenkamp confirms that the duration of the strategic portfolio is now fixed at about eight years (although of course tactically this could change), with ABP happy to run this much mismatch risk against its long-dated liabilities.
We estimate that to move ABP’s €87 billion fixed-income portfolio (the value at the end of 2006) from five years’ to eight years’ duration would have required receiving about €26 billion in 10-year swap equivalents.