2018 NextGen

“Rens’ main task as head of asset management is to be the lead responsible for asset allocation decisions as derived using detailed asset liability modelling (ALM) projects. This is very challenging as the pension plans can differ fundamentally from one another. Each plan has its own governance structure with an independent board of trustees and investment committee, and operates in a different regulatory environment. Rens needs to reconcile local regulatory views on funding and solvency requirements with the company’s accounting standard, US GAAP.

The ALM framework was developed with Ortec, the Dutch consultancy, which has a strong footing in Switzerland. Ortec has licensed the use of its technology to ABB. This allows the company more flexibility and freedom in applying the consultant’s ALM models and scenario analysis to its own needs. This way, ALM is studied consistently and independently of each plan, across all the company’s liabilities, but also taking into account the inherent differences in each plan population. Rens has been very successful with this task and has contributed to very good risk adjusted returns.

Another of his tasks is to implement the asset liability modelling projects consistently across the ABB Group. Local rules might dictate what asset classes local plans can invest in, or how the asset class should be implemented. Country regulators may also set limits on exposure to a certain asset class. All of this has to be modelled accurately. An ALM project that is not investible is a waste of everyone’s time and energy.

A particular strength of Rens is his ability to accurately communicate complicated financial pension topics to the independent boards and investment committees. These boards / investment committees are the decision makers and it is critical that they understand how a recommendation has been constructed and what are the risks associated with their decisions. A well informed discussion is far more likely to lead to a good decision.”

— Andy Halsey, head of pensions, ABB

ABB’s portfolio delivered a 24.63% return over the past four years while navigating  the challenges of keeping track of 100 defined benefit plans with $10 billion AUM and 50 defined contribution plans with $5 billion AUM, each with its own governance structure, spread throughout the globe. As head of asset management, Rens Götz, was largely responsible for creating the digital architecture to keep the plans accountable. He used a detailed asset liability modelling through a framework developed in partnership with Ortec, while also reconciling governance differences, and explaining concepts to the investment boards.

Some wonder whether the former chemist finds time to sleep. In the future, Götz will be working to further diversify investments. Constantly learning from his office in Switzerland, the 31-year-old is honing his knowledge to improve investment governance and incorporate effective impact investing during the years ahead.

CIO: What are the accomplishments you are most happy to have achieved recently, and why?

Götz: After an extensive process creating our digital infrastructure and getting the support and confidence from our local pension boards, we’ve been able to reap the benefits in supporting investment decision-making and corporate strategy. With a relatively small team, we’ve quickly made ourselves a key component of the asset allocation process, improving the understanding of board members in local regulation and sponsor effects. The process itself has led to stable strategic asset allocation decisions, layered with a dynamic overlay taking advantage of medium-term (one to three year) risk/return dislocations between asset classes. The setup has resulted in a steady outperformance compared to a rebalancing to strategy without increasing balance sheet risks. On top of that, it provided non-professional board members and trustees with the information to make well, professionally informed decisions thanks to reliable, robust, and fine-tuned asset-liability management technology. Sharing knowledge is the key to success.


CIO: What would you be most excited to accomplish in the year ahead, and why?

Götz: Important going forward is the integration of asset manager strategies to complement risk diversification in our overall portfolios. The past seven years have been pretty much risk on, where passive investments benefited as the entire market was returning well. I believe this relatively easy environment for investing is coming to an end, and that diversification of investment mandates will become more critical. Apart from global diversification—which is critical in a multipolar world—it will be important to understand which exact economic utility is served with your investment, without of course losing an eye on the risk management.

CIO: What’s the most rewarding aspect of being an asset owner?

Götz: Apart from supporting corporate decision-making, our role also boils down to ultimately being able to provide the employees of ABB with a good additional income after retirement. ABB currently employs over 130.000 people worldwide and has many retired employees who worked a fair share of their life for the company. A good income post-retirement provides them with additional satisfaction and appreciation for the company they worked for. Serving the people that work for ABB and contributing to the development of sustainable technology is most rewarding.

CIO: What’s the most challenging?

Götz: Not falling into the “easy money trap,” every two to three years or so we see new innovative products being pushed to the market which do not necessarily bring economic benefit in the long term. Taking advantage of short-term opportunities should only be done after fully understanding the need and reasoning behind a financial product. Who needs the funds, who benefits, and what economic utility does it serve.

Additionally, there is the challenge of diversity in local regulation. In many jurisdictions, the regulator allows funds to calculate with very different assumptions compared to the more economic market value standards. Communicating this divergence between countries in perceived and actual funding levels to stakeholders is challenging. Ultimately, regulatory changes or long-term underperformance to the assumptions would lead to severe consequences for plan sponsors

CIO: What are you most hopeful about in the future of the industry?

Götz: Currently, I think a very promising move is impact investing, ranging from micro-credit to environmental energy infrastructure projects. I believe allocation of capital needs to be done efficiently, but also responsibly. There are many great opportunities out there which make sense to invest in financially, but also help to move the world forward. The (in)famous quote “Greed is good” by Gordon Gecko only works well when your investment horizon is short term; ultimately everyone’s lives are still dependent on the long-term benefits to society as well.

CIO: What are you most cautious about?

Götz: Cautiousness to the promises that have been made in defined benefit systems across the globe. Not only are these promises becoming harder to fulfill in the current economic reality, also the costs to buy new promises are much higher now than they have been during the 1980s or 1990s. Back then, with interest rates above 4%, compound interest and investing in a diversified portfolio made a lot of sense. Currently, at lower rates, investing is becoming more and more a way to hedge yourself against a potential rise in inflation, the expected nominal return benefits in what we would consider to be a stable price level environment are limited. This ultimately will lead the participants to question the need of having pension investments.

CIO: As a leader, what are the most important aspects of the industry you hope to change over your career?

Götz: I think investment governance is a very important topic that will need to improve over the years to come. The difficulty of balancing decision-making between the ultimate beneficiaries and the investment professionals is something that should be worked out further. This includes, but is not limited to, representation of diversity in decision-making. Diversity is not limited to superficial features, but should be diversity of background, culture, and point of reference. Currently we are too easily resorting to easily to measure, but hard to value, indicators of diversity.

Additionally, for asset managers, it will become crucial to distinguish themselves in order to warrant active management fees. The times of high fees for non-transparent investment structures are over, however, people will always be willing to pay for true value.

CIO: If you had one piece of advice for your peers, what would it be?

Götz: Invest for yourself and your team in education; continued learning is vital in the information age. Knowledge, and the ability to creatively use this knowledge, is what is going to set you and your team apart from your peers. Current developments in AI and machine learning are driving change at an incredible pace, but ultimately real innovation and the ability of being the first to implement will still come down to human skill. Never stopping learning.  Learning outside of your direct field will keep you up to date on recent developments. Real innovation usually comes from outside the sector.

CIO: What are the biggest current trends you are seeing that have surprised you?

Götz: Within my own field of expertise, I see the development of next level ALM [assets and liability management.] Ever since the crisis, there has been a lot of criticism on ALM and its incapability to protect the funds from downside effects. Now you can start to see boards and trustees starting to use ALM in a completely different way, moving away from “checking-the-box” type of optimization processes, and much more focusing on the insights and knowledge coming from a limitless set of potential analyses. For instance: investigating what the influence of a specific asset class (e.g., real estate) is during an inflationary period. Incorporating an enhanced ALM framework in decisions-making is what will drive outperformance from allocation decisions in the future.

On the more general investment side, the large move in ESG within the US has surprised me. For one, I would have expected it earlier, on the other side I wouldn’t have expected the decision-making and implementation to be going this quickly. On top of that, there are the developments in the behavioral aspects of communication to participants that’s really taking off. Especially in the Netherlands and Denmark, we can clearly see pension funds currently taking responsibility in informing the active population on the benefits they could expect to receive, and how far this would cover their cost of living.