The Dutch ETF market reflects the international outlook of the country's economy. Paul Burgin explores pension fund interest in ETFs and the trend for vanilla products
When you are small and have few of your own natural resources, you have to think big. From the 15th century, the Dutch provinces grew rich on the back of shipping and trade with the rest of the world. The Dutch East India Company – known as the Veering Oost-Indische Compagnie or VOC – was the world’s first multinational conglomerate and the first to issue common stock.
The VOC’s global reach has been emulated by the modern corporate titans in the Netherlands, such as Philips, Royal Dutch Shell and Unilever - although none of the current entities have their own private armies and start bloody wars.
The Dutch financial sector is dominated by local pension firms which operate quasi-mandatory union, sector and occupational schemes, covering over 90% of the workforce. The sector is one of the world’s largest at over €500bn, despite covering just 5.5 million active members.
Pension funds dominate the ETF investment scene. They have been keen adopters of index-linked products as a means of diversification. Institutional investors have always set high standards for liquidity and transparency and both of these features have become more important since the financial crisis.
As a result, pension funds are generally conservative in the products they select. Bradley Kay, associate director of ETF Research at Morningstar, said: “When it comes to products, nothing is extravagant.
There are a few ETFs that are unique to the local market, but otherwise everything looks very similar to the rest of Europe.” The local market exceptions are based on the AEX index of 25 leading Dutch stocks that trade on the Amsterdam exchange, part of the NYSE Euronext group.
Total assets and turnover in AEX-based products are swamped by bigger and more liquid mainstream offerings. Figures from the Amsterdam Exchange show Eurostoxx, French CAC 40 and German DAX index trackers account for half of all trades by turnover in the year to date.
Just one fixed income tracker, the Lyxor ETF Euro Cash, and one non-EU equity tracker, the Lyxor ETF Russia, make it into the top ten by turnover. The assets under management league table is headed by equity ETFs tracking the Dow Jones Industrial index, S&P 500, FTSE and Eurostoxx issues, as well as corporate bond fixed interest products.
Vanilla is flavour of choice
For most investors, plain vanilla is the order of the day. Thematic, leveraged and short products from the few local issuers remain thin on the ground, although that has not stopped a few opportunistic players from trying to widen the product line up.
Local player Think Capital has a range of straight AEX and AMX mid cap ETFs, along with sector asset allocation defensive and pro-cyclical equity and fixed income funds. However, Kay at Morningstar said Lyxor’s short and leveraged AEX products have not proved successful in gathering assets from Dutch investors.
ETFX, the multi-counterparty equity ETF platform offered by ETF Securities, is building a reputation in the region for its precious metals products. Nonetheless, Kay said: “Metals, water, coal and shipping products are not attracting the sort of assets in Europe that they do in the US. The Dutch market is even more sober than the European average.”
The rest of the market remains resolutely dominated by iShares. It was first to market in the Netherlands ten years ago, starting with cash based equity Eurostoxx and FTSE products in 2000. These were followed several years later with local listings of US equity trackers and the country’s first fixed interest vehicles. The firm continues to have the market share in terms of product numbers and assets.
Roel Thijssen, head of sales for the Benelux region at iShares, said: “The Dutch market is an important market for ETFs and for iShares in particular.” He said over the last decade, a number of features have made the Dutch market unique, not so much in what products investors buy but why and how they buy them.
Institutional pension fund buyers remain dominant, although wealth management and retail investors are beginning to appear in greater numbers. For institutions, the key drivers have been the race to diversify and pension trustees’ demands for transparency and understanding of risk.
As a result, iShares allocates substantial resources to explaining the differences and risks between cash-based and swap-based ETFs. Thijssen said: “This is a very professional, experienced market. Dutch investors have been investing abroad for more than 50 years. There is a lot of knowledge about replication but it has taken a lot of effort to build it.”
The financial crisis hit Dutch pensions hard. Assets dropped sharply in 2008 and into 2009, resulting in political intervention and sackings for poor performance. In its 2008 annual report, the regulator De Nederlandsche Bank (DNB) warned that funding levels across the industry had dipped to 95%, well below the minimum requirement of 105%.
It said tough measures would be put in place to ensure funds rebuilt reserves. Pension funds are also required to adopt new strategies to eliminate shortfalls within three years.
Government commissions found that €20bn of the €120bn losses suffered by Dutch pensions in 2008 was down to poor implementation. The Frijns Committee and the subsequent Dufas Principles urged greater involvement by scheme trustees, less hands-off delegation and clearer definitions of the responsibilities of funds, advisers and their delegated investment professionals. In short, trustees had to be more involved, more knowledgeable and more responsible for investment decisions.
New measures and practices are being put into place, although rebuilding assets has taken time. By April 2009, coverage ratios at the Dutch public servant superannuation scheme – Algemeen Burgerlijk Pensioenfonds, ABP – had dropped to 83%. The country’s second largest scheme, the Stichting Pensioenenfonds Zorg en Welzijn (PFZW) operating in the healthcare sector, had a ratio of 92%.
The market rally from March 2009 helped restore pension assets to pre-crisis level. But as their liabilities also increased in the previous two years, many schemes remain below the statutory funding levels. ETFs played a role in the restoration of portfolio values, thanks to their low costs and flexibility. Thijssen said: “Pension funds are under pressure. Future liabilities present a huge challenge.”
Shift to greater transparency
Regulatory changes and funding challenges have added to the need for greater transparency. Thijssen said iShares’ new swap-based ETF platform will help allay fears about risks and counterparties. Daily collateral information will also encourage investors to explore different structures and index trackers.
Thijssen said wealth management and private banking will be a source of new business growth. Leading adviser groups such as ING and Fortis are changing their advisory models, having been through painful restructuring processes. The financial regulator is following a course similar to the Retail Distribution Review being undertaken by the Financial Services Authority in the UK. Commission is being removed from product sales, opening up new avenues for non-trail products such as ETFs and structured products.
Rabobank head of ETF marketing Matthew Carr sees plenty of potential for new products and players. He said: “The turmoil suffered by the big distributors has opened the door to more bespoke private banking advice and products.”
Rabobank has partnered with ETF Securities in what Carr views as a three-pronged rollout of new products. The first two products will be sold via Rabobank’s own networks and other private banks. In the short term, AEX and AMX products will cater for demand for domestic indices, with a focus on retail business and small and medium institutions. Carr said: “Investors want the products they feel most comfortable with.”
The second stage of products will focus on thematics, based around the historic global trade links that the bank and Dutch investors know well. These include agriculture ETFs, drawing on Rabobank’s extensive trade financing for Dutch producers. These products are likely to go down well with wealth managers who have long term preservation and growth aims.
Institutions are also increasing their exposure to other themes. In emerging markets, the Netherlands may well see the first unique products that concentrate on trade links with former colonies such as Indonesia.
The largest institutions have strong buying powers and will focus on costs, said Carr. Smaller players are leaning towards such products to compliment their in-house skill sets that concentrate on domestic and European equities and fixed interest.
New products will attract more institutional clients to ETFs, but their usage will remain outside of core strategies. Carr said: “They will use them for overlay and tactical short and medium term plays without disrupting their core portfolios.”
The compact nature of the Dutch institutional market will not result in a free-for-all and a large number of exotic products. Carr said any ETF needs to attract €100m to be cost effective. Not every new entrant will be able to achieve such AUM in a country of just 16.5 million people.
The final stage of Rabobank’s strategy will concentrate on sustainability. Many Dutch schemes have specific mandates on governance and ethics. Water and alternative energies are already attracting interest. Carr said Rabobank plans to build on its own asset management arm’s sustainable indices expertise to create new ETFs in the future.
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