“The backbone of every pension portfolio”

Published on: 6 December 2023

For an investor of APG’s size, with pension fund clients with long-term liabilities, the government bond segment will always play a role within the strategic allocation. It offers relatively stable and secure returns while acting as an interest rate hedge. But there is more to this fixed income asset class. APG manages a portfolio of developed market government and government-related bonds that offer responsible investment opportunities, diversification benefits and appealing risk/return profiles. Head of Government Bonds, Olaf van Veen tells us more.


Firstly, to put the record straight, the reputation of government bonds as stable and rather boring investments has been severely put to the test in the last couple of years. “After more than a decade of unprecedentedly low interest rates, the war in Ukraine and resulting energy squeeze have pushed global interest rates higher, causing turmoil and volatility in even the ‘safest’ parts of the market,” explains Van Veen. “That notwithstanding, for long-term investors like pension funds, developed market government bonds will always form the backbone of the portfolio.”


Safe and sovereign

The largest proportion of the assets APG manages are invested in developed market sovereign bonds. This basically means about 22 different issuers: from AAA- or AA-rated countries like the Netherlands, France, Germany, Spain and the US, to BBB-rated countries like Italy. Van Veen: “These large sovereign issuers provide us with the volume and liquidity we need. Developed market government bonds are primarily interest-rate investments, with a longer-dated (over 10 years) section of the market that enables APG to match pension-related liabilities more effectively. They are also very tradeable and can be used as collateral.”


APG’s clients prefer to hold cash bonds (as opposed to futures or other derivatives) where possible. As a result, the sovereign holdings pretty much always feature in the top investments in size terms for all of the pension fund clients, explains Van Veen. “With our team of six portfolio managers, all based in the Netherlands, we manage around 20% (EUR 120 billion, as of June 30 2023) of APG AM’s total assets. So, per capita, that is quite a lot of money; quite a lot of responsibility. That said, of course, the team works together with many other APG AM teams to execute swiftly – for example, with the trading desk to provide liquidity when required – and to ensure a low cost base for our clients. And as government bond movements are closely linked to interest-rate and inflation developments and central bank policy, we also contribute to the in-house macroeconomic view.”


Greener governments

The government and government-related bond segment is also an area that has witnessed rapid growth in sustainable issuance. In terms of sovereign green bonds, developed markets in Europe lead the way. According to Van Veen, as the market has grown, the premium associated with green issuance (“greenium”) has pretty much evaporated and liquidity has improved. “It is becoming cheaper to own green bonds and this part of the market gives us an excellent opportunity to contribute to our clients’ responsible investing ambitions with the most risk averse part of the portfolio. APG participates regularly in new sovereign green bond issues on behalf of clients, for example, investing 600 million euros in last month’s Dutch sovereign issue. We are not only a recognized party in the market due to our size but also because of the work we do behind the scenes, talking to issuers to help raise market standards. We are also frequent and large buyers which gives us the chance to make our voice heard.”

Flexible approach

“One way we probably differ from other pension fund government bond teams in the Netherlands is the amount of flexibility we have in terms of what we can invest in,” explains Van Veen. “This is because we can also invest in government-related issues. These are, for example, bonds issued by supranational entities like the World Bank and the EU. Van Veen: “Although there is more risk associated with these issuers, they always carry some degree of government backing. The premium they offer versus normal government bonds makes them a good fit in our universe. These issues also bring interesting diversification benefits due to the breadth of the projects they finance and the fact that these cannot always be accessed by other forms of investment. The use of proceeds of many of these issues target social and environmental projects that resonate with our pension fund clients’ investment and impact views.”


Increasingly customized

In addition to government-related issues, APG also started investing in social housing loans about three years ago. These are long-term income investments with a government guarantee structure. “We lend to social housing corporations via a platform. These loans give us an attractive spread pick-up versus the yield on Dutch government bonds while being exposed to a relatively low level of risk,” explains Van Veen. “Social housing investments also make a contribution to achieving certain Sustainable Development Goals (SDGs), for example, SDG 11: Sustainable cities and communities. As such, these issues help fulfil our clients’ targets for Sustainable Development Investments (SDIs). The attractive return and long-term nature of these loan investments mean that they match our long investment horizon, so we adopt a buy-and-hold approach. We currently have over 1 billion euros invested in these loan products, and we expect to increase investments in this area.” The social housing loan and labeled bond investments make the government bond asset class the third largest SDI contributor within APG.

Another recent development in how APG works is the shift to segregated accounts for each of the clients. “This enables us to customize the portfolios to match the wishes of individual clients in line with their specific investment beliefs and requirements,” says Van Veen. “We can adjust the portfolio in terms of currency exposure, ESG needs and duration and fulfil the collateral requirements. We believe this change in the way we work will enable us to be more agile and serve our clients more effectively.”