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Measuring and Managing Risk, Return and Incentive Compensation at apg Stefan Lundbergh, Head of Innovation Centre, APG Investments Onno Steenbeek, Head Corporate ALM and Risk Policy, APG ICPM meeting Toronto, 3 June 2008

Measuring and Managing Risk, Return and Incentive Compensation at apg

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Measuring and Managing Risk, Return and Incentive Compensation at apg. Stefan Lundbergh, Head of Innovation Centre, APG Investments Onno Steenbeek, Head Corporate ALM and Risk Policy, APG. ICPM meeting Toronto, 3 June 2008. Agenda. APG: new kid on the block - PowerPoint PPT Presentation

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Page 1: Measuring and Managing Risk, Return and Incentive Compensation at apg

Measuring and Managing Risk, Return and Incentive Compensation at apg

Stefan Lundbergh, Head of Innovation Centre, APG Investments

Onno Steenbeek, Head Corporate ALM and Risk Policy, APG

ICPM meetingToronto, 3 June 2008

Page 2: Measuring and Managing Risk, Return and Incentive Compensation at apg

2

Agenda

1. APG: new kid on the block

2. Starting point: financial strategy

3. Risk management

4. New Portfolio structure (LHP-ROP)

5. Innovation

6. Challenges

Page 3: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Top 10 assets pension investors

Source: P&I/Watson Wyatt World PF 300, 2007. For APG combined figures for government, education and construction sector pension fund assets.

0

50

100

150

200

250

300

350

400

450

500

Government,Japan

APG,Netherlands

Government,Norway

CaliforniaPublic

Employees

NationalPension, Korea

FederalRetirement

Thrift

GEPF, SouthAfrica

California StateTeachers

New York StateCommon

LocalGovernment,

Japan

1.000

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2. Starting point for clients: financial strategy

Step 1: pension deal

Step 2: expected cash flows (liabilities)

Step 3: utility function Board of Trustees

Step 4: financial strategy

Step 5: strategic investment plan

Step 6: current asset mix

Page 5: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Crucial tool: ALM

Probability underfunding in 12 months < 2,5%

Currentposition

Expectation

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Most important tools:

a) Conditional indexation

b) Diversification

c) Duration extension

d) New portfolio structure: LHP-ROP

2. Risk management at the fund level

Page 7: Measuring and Managing Risk, Return and Incentive Compensation at apg

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2a. Conditional indexation

100% indexation

+ catch-up

ind

exa

tio

n

100%

104,3%

140% funding ratio

0%indexation

Funding ratio1 November: 131,2%Example: 130%

105%

Page 8: Measuring and Managing Risk, Return and Incentive Compensation at apg

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2d. LHP - ROPStrategy derived with participants in mind

• Pension Investor ≠ General Asset Manager

• Risk free Dutch linker with 17 years to maturity

• Objective High and stable long-term real returns

• Restrictions Mismatch risk• Horizon Client (15+ years, real)

Regulator (1 year, nominal)

Page 9: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Theory – Finance 1.1

LHP (ILB+…)

Best Mix of Stocks, Bonds and other assets (ROP)

Conservative Investor

Bonds

Stocks

Aggressive Investor

Moderate risk averse

investor

Risk

Expectedreturn

Page 10: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Simple on the outside, complex inside

ROP

LHP

Page 11: Measuring and Managing Risk, Return and Incentive Compensation at apg

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[email protected]

• Idea generators our 450+ professionals• Decision body Innovation Committee• Operational body Innovation Centre• Innovation process stepwise with low entry hurdle• Capital allocation 2 percent of assets• Continuation safe environment, opportunity

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Innovation Process

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Example 1: Timberland

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Example 1: First investment

Global Solidarity Forestry Fund

Page 16: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Example 3: Landfills

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Challenges

• Culture and Attitude

• Competitive remuneration

• Organizational focus on investment RETURN

• ALM as integrated part of pension fund investing

• Augment collective pension solutions

Page 18: Measuring and Managing Risk, Return and Incentive Compensation at apg

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Concluding remarks

• Pension Investor ≠ General Asset Manager

• Our approach is based on our situation

• We explore our unique advantages

• Open to innovate with peers and likeminded

Complex + challenging + difficult = interesting

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Thanks for listening