APG, the biggest pension provider in Europe, is positioning itself as a digital pioneer with investment in the large-scale use of data, workflow automation and digital analytical platforms. A leader in funds management, most notably sustainability, it is once again a frontrunner by embracing technology.
As simple as it sounds the first step in the transformation to becoming a digital funds manager according to APG’s chief investment officer Peter Branner is to prioritise data.
“We will make data more important than it is now and we will take full ownership of our own data,” he says of the fund’s five-year plans.
This means investing substantially in a data hub to store external and internal data and investing in resources to interpret and use the data.
The €600 billion APG has set out its next five year strategic plan where the digitalisation of asset management is core.
“We are looking at how we work and how we execute and are ramping up our use of technology,” Branner says.
For the past couple of years APG has been recruiting personnel across the business who have a digital lens.
“We need people who think digital, and a requirement for people we have been recruiting is a data mindset and toolbox. We’re recruiting in the areas we need internally from programming to assessing investments from a digital perspective,” he says. Existing staff have also been through a training program in different areas of digital upskilling.
The digitalisation applies to workflow as much as it does to risk or investment opportunities and the workflow of different teams has been mapped with the view of automating high-use activities.
“One of my mantras is think smart: the second time you use it, program it,” Branner says.
In a quest for constant improvement across the business a focus on remaining relevant is driving efficient and nimble processes and Branner says being a good funds manager is 50 per cent about being a good administrator, and 50 per cent about being a good investor.
The organisation manages about three quarters of its assets internally and has also ramped up the digital competence in its quant team to enable trend spotting in economies and companies.
“We can evaluate our credit and equities and understand who will be the winners and losers in our portfolios. That analytical work will be even more important in the years to come,” he says. “In the quant area it’s about getting us away from the old-school factor investing to the modern use of AI and big data. And that means getting your data in order so they have strong in-house data to work with.”
APG has been on a digital journey since 2016 when it first started hiring data scientists in its investment team. In 2018 it took over Deloitte Netherlands’ data analytics activities for sustainable investing which gave it a ready-made process and team for extracting information.
In addition APG, alongside PGGM and later AustralianSuper and BCIMCo, developed the Sustainable Development Investment Asset Owner Investor Platform which is an AI-driven technology that sifts through reams of structured and unstructured data to gauge the extent to which companies’ products and activities meet the UN’s SDGs.
“I’m excited about that journey we are on with ESG and data,” Branner says.
Sustainability: An old friend
Sustainability lies at the heart of everything APG does as one of its strategic pillars and is central to all investment decisions.
On behalf of its clients, including the giant ABP, APG is on a path to net zero and has already decreased its carbon footprint of the equity portfolio by 39 per cent against the 2015 base year.
It’s also targeting the SDGs identified by clients.
“That is of course a large extent an asset allocation story but also within each portfolio we have allocations to different SDGs and have targets. This year we bought forests in Chile and Australia as we are participating in SDIs our clients are after.”
By the end of 2020 APG had invested more than £90 billion in companies and projects that contribute to the SDGs.
APG has also participated in various green bond issuances including one in July this year by a large UK retailer. And in 2020 invested more than £1 billion in Covid bonds.
Across unlisted assets the sustainability theme continues with infrastructure allocations to electrification performing well.
As a long-term investor – APG measures performance over a five-year period – Branner also says engagement is focused on the long term.
“We put a lot of attention on this point, and how engagement is an integrated part of our investments. How we report on our engagement and rationale will grow. In the coming years that will be a very important part of our activity.”
The next five year plan for the organisation, not surprisingly, includes a strong ambition for responsible investment.
“You don’t get first by stepping in other people’s footprints,” Branner says. “So we try to influence the regulators and how they are driving the policy and taxonomy and we sit on the boards of many authorities that set the standard for the industry. RI is multi-faceted so how we remain at the front of this is by influencing policy and working intensively in the investment process itself, where it is very integrated alongside risk and cost. We are modernising and evolving all the time to become stronger. This is also linked to digitalisation, as we become more data driven in responsible investment.”
Asset allocation
The AUM of APG jumped €20 billion in the first six months of the year, ultimately benefiting members which are made up of about a quarter of the population of the Netherlands.
The asset allocation reflects the clients’ investment plan and is updated every three years. Currently the liability-driven approach results in an asset allocation of 40 per cent in fixed income, 35 per cent in equities and about 25 per cent in alternatives.
Branner says that like other investors and policymakers inflation is top of mind for APG.
“Getting the inflation bet right is the number one topic occupying most central banks and all people invested in fixed income. Is transitory inflation we see now continuing?” he asks. “The inflation story is important and our view is probably that you have to follow what the central banks are doing. Perhaps more important than inflation itself is what the central banks are saying.”
The APG portfolios are deliberately taking into account that inflation could increase but it is not taking any bets on the topic per se.
“We are long term investors and are treading carefully here. We have a solid portfolio in an all-weather approach. It’s not about getting inflation right but in our scenario testing we have this in mind.”
The most important long-term, macro theme for APG in scenario planning is climate impact, particularly in real assets.
“This summer showed that again in real assets,” he says. “One of the most scary quotes from the press conference launching the IPCC report was what used to be a one in 100 year event is now happening twice in a decade. That tells the story well. We have been assessing climate in our assets for a long time but the risks are higher now so we need to account for that in valuations and scenarios that are less rosy.”
