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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 meeting Toronto, 3 June 2008. Agenda. APG: new kid on the block

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Measuring and Managing Risk, Return and Incentive Compensation at apg

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  1. 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

  2. Agenda • APG: new kid on the block • Starting point: financial strategy • Risk management • New Portfolio structure (LHP-ROP) • Innovation • Challenges

  3. Top 10 assets pension investors 1.000 Source: P&I/Watson Wyatt World PF 300, 2007. For APG combined figures for government, education and construction sector pension fund assets.

  4. 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

  5. Expectation Current position Probabilityunderfunding in 12 months < 2,5% Crucial tool: ALM 5

  6. 2. Risk management at the fund level Most important tools: • Conditional indexation • Diversification • Duration extension • New portfolio structure: LHP-ROP

  7. 2a. Conditional indexation Example: 130% 105%

  8. 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)

  9. Theory – Finance 1.1 Aggressive Investor Expected return Stocks Moderate risk averse investor Best Mix of Stocks, Bonds and other assets (ROP) Bonds Conservative Investor LHP (ILB+…) Risk

  10. Simple on the outside, complex inside ROP LHP

  11. Innovation@apginvestments.nl • 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

  12. Innovation Process

  13. Example 1: Timberland

  14. Example 1: First investment Global Solidarity Forestry Fund

  15. Example 2: Music Rights

  16. Example 3: Landfills

  17. Challenges • Culture and Attitude • Competitive remuneration • Organizational focus on investment RETURN • ALM as integrated part of pension fund investing • Augment collective pension solutions

  18. 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

  19. Thanks for listening

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