PGIM Fixed Income: Four Dutch institutional themes for 2024

28 maart 2024

In a world that is changing rapidly, institutional investors need to adapt accordingly. Anna de Jong, Head of Client Advisory Benelux and Nordics at PGIM Fixed Income, highlights four key investment themes in the Dutch institutional market for 2024 and beyond.

Asset allocation changes in a new era of attractive bonds yields

After an era of zero or even negative interest rates, the ramping up of rates by central banks over the past two years has completely changed the outlook for returns in public fixed income markets and warrants a critical review of existing asset allocation and investment strategies. The risk/return profiles of different asset classes have changed substantially, especially when taking liquidity constraints into account.

Dutch institutional investors tend to review their investment strategies towards year-end and while we have not yet seen significant asset allocation adjustments just yet, the first signs of investors derisking by moving out of illiquid asset classes and equities are starting to surface and we expect an increased interest in public fixed income to materialise throughout 2024.

In the Nordics, we have already seen some shifts with moves out of equities into credits. Credit has a better risk-return profile over equities and given the continued uncertainties over stocks, the downside capture potential for credit over equities is particularly attractive. 

Fiduciary managers outsourcing a larger part of their fixed income mandates

Larger Dutch pension funds that previously managed almost all their fixed income portfolios in-house are increasingly outsourcing some of these capabilities or are actively considering options to do so. Outsourcing is done for reasons of performance, cost efficiency, transparency and speed of execution.

For example, external managers can implement changes to ESG-related investment restrictions much faster. They are also much easier to negotiate fees with, or adapt mandates to evolving investment priorities. Larger, more established, asset managers should benefit from this outsourcing trend. They can handle the scale and have the resources to deal with the increased regulation that comes with running these types of mandates.

From excluding markets to a proactive 'know what you own'

While previously, Dutch pension funds were leaning towards investing based on excluding emerging markets with low ESG ratings, some are increasingly understanding that a smaller investment universe limits the ability to outperform. Also, they are moving towards a 'know what you own' approach which includes proactive engagements with companies and countries either directly or through their asset managers, based on their investment convictions and ESG impact targets. We expect this trend to continue not least because as pension funds aim combining an attractive investment return with facilitating a specific ESG-impact, this might quite often lead them towards corporates and sovereigns that might otherwise have been excluded.

Investors’ need to align with global warming limits

Investors increasingly want to know whether their portfolios are ‘Paris-aligned,’ meaning the underlying assets should have the goal of contributing to limiting the rise in average global temperature to well below 2°C above pre-industrial levels. Pension funds often rely on backward-looking data on carbon footprints and set targets for a percentage reduction compared with their benchmarks.

A more promising approach would be a forward looking focus on carbon trajectories and the specific plans and concrete measures of governments and companies, and proactively contrasting those with the changes needed to be aligned with specific goals. While this approach arguably involves more in-depth analysis, it provides a much more thorough analysis, directing investments towards corporates and sovereigns that are essential and proactive contributors to reducing the impact of global warming.