For decades Dutch pension cash flowed to the place most likely to deliver steady and safe returns: government bonds.
No longer. Now the investor behind the Netherlands’ biggest pension fund is channeling retirement savings to a Belgian airport, a bicycle parking lot in Utrecht and toll roads in the U.S. and Spain.
“Because of low interest rates, we have to cast our nets far and wide to search for returns,” said Thijs Knaap, senior investment strategist at APG Asset Management. “We increasingly invest more away from home. It’s where the growth is.”
In a world of stuttering expansion -- where yields on $14 trillion of bonds have turned negative -- income is draining away on government debt that matches their long-term liabilities. So they’re getting creative to meet ever more-elusive return targets.
Knaap is at the vanguard of a move by the most conservative investors into areas far outside of their safety zone. They’re fueling a boom in alternative assets such as private equity, property and infrastructure that PwC estimates will jump to $21 trillion in 2025 from $10 trillion in 2016.
“You’ve had a mad rush into these private assets,” said Elliot Hentov, head of policy research at State Street Global Advisors. “It’s a low-yield environment, everyone is piling in.”
Even the Church of England is getting in on the act. Its pension board is scaling back stocks in favor of private debt including loans to small, and medium-sized companies. In Japan, the Government Pension Investment Fund’s coping strategy for negative yields is to leave: the world’s biggest pension fund is considering currency-hedged foreign bonds as part of its domestic debt portfolio.
Central banks around the world delivered more than 700 cuts over the past decade and spent trillions buying bonds. That helped to dodge a depression following the 2008 financial crisis, but growth has eased after a brief rebound, and most major economies undershoot policy makers’ inflation targets. The U.S.-China trade war and a slew of geopolitical risks are adding headwinds to growth, deepening the lower-for-longer trend for interest rates.
“Growth is sub-par, and declining,” said Jean-Jacques Barberis, head of institutional client coverage at Amundi SA. “We’re in a cycle that never seems to end, as monetary policy is being pushed and pushed to limits. Interest rates are going to stay low for a long time.”
Gains from bonds will be generally close to zero in the coming years, according to Amundi. It expects the Barclays Euro Aggregate index to lose 0.1% over the next three years, before returning 0.2% over the next five and 0.3% over the successive decade. BlackRock Inc. reckons that a typical 60/40 strategy in which 60% of assets are allocated to equities and 40% to bonds will see average returns fall to 3.5% over the next 10 years from 8.5% in the past decade.