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.”
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.”