Investor Spotlight: Blue Sky Pioneers Integrated Portfolio Management

Rob Brand
Head of Fiduciary Management, Blue Sky Group

The Dutch pension industry is undergoing seismic shifts. Long-anticipated reforms enacted in July 2023 ushered in a Defined Contribution system that is set to be unique among global counterparts. Recent years have also seen the regulator (DNB) raising the bar for pension fund trustees of both DB and DC plans, emphasising that responsibility for key decisions cannot be delegated to their providers. The term ‘fiduciary manager’ is increasingly being replaced by ‘fiduciary partner’ – a name closer in spirit to the (increasingly popular) ‘Outsourced CIO’.

For Rob Brand, fiduciary management head at €25 billion fiduciary manager Blue Sky Group, the changes spell one thing: firms like his must step up and deliver, notwithstanding the pressure it may place on resources. “Fiduciary managers must do more,” he says, pointing to the need for enhanced education and support as providers help board members to make their own decisions, even though the added workload “puts pressure on the fiduciary management model”. The oncoming flood of individual DC clients, who also require appropriate communication and support, will add to the demands.

New stressors call for innovation. Over the past two years, Blue Sky has worked to improve efficiency and clarity through a move to ‘Integrated Portfolio Management’: an approach that brings together staff across the different strategic and portfolio management disciplines, finding valuable synergies. It is also a philosophy that welcomes outsourcing wherever it may produce benefits.

Brand recently sat down with bfinance Investor Spotlight to explain the Integrated Portfolio Management model and developments in Dutch fiduciary management as the country’s pension system evolves.

Q: What is Blue Sky’s ‘integrated portfolio management’ approach?

The concept of integrated portfolio management is to integrate the people who manage the portfolio ‘top down’ – constructing asset allocation, hedging currency, hedging rates – together with the portfolio managers who are responsible for hiring and firing external managers. We look to find synergies between the two disciplines. For example, a colleague selecting an Asian real estate manager with assets in Singapore dollars isn’t thinking about currency; you can find synergies if that person is in the same team with those who do think about currency, able to discuss together.

We moved towards this integrated model a couple of years ago. Following that, we have changed our approach to the asset classes to make that more integrated as well: it’s been a gradual shift over the period, and we have seen an increase in the team’s performance.

One important aspect of our approach is the use of outsourcing. We try to ‘do everything’ but we are agnostic about whether we are doing the legwork ourselves or delegating it to a third party. There are providers that may be able to do certain things better, or cheaper, or with a lower risk profile. For example, we already have 100% of the asset management done by external fund managers. Recently, we completely outsourced the monitoring of our private real estate managers. In manager selection, bfinance helped us with a recent infrastructure search that also had a renewable component (this was also a collaboration that helped us to gain knowledge in a specific field). There are certain parts of our target operating model that are outsourced, such as administration, compliance and front office tooling: we used to host our own tooling and systems but now we have a SaaS provider.

Q: How are you taking a more integrated approach to organising the asset classes?

We have an investment plan (asset allocation) reviewed annually, but every two years we also have an overhaul to look at the business case for each asset class, how investible the various sub-asset classes are and so on. After the last one, around two years ago, we decided to reorganise responsibilities in the team to put them more in line with the ‘investment case’ for the asset class. For example, equity and private equity have a similar ‘case’ so we wanted to bring them together. Listed equity and private equity people have more in common than they might realise. They like thinking about sectors, markets, themes. Discussions like ‘should we be overweight healthcare’ or ‘should we change the way we’re thinking about technology’ or ‘how should we think about exposure to smaller companies versus larger companies’ benefit from including both groups.

Q: What were the catalysts for moving towards a more integrated approach in the investment team?

There are several driving forces here. As well as the changes in how we ourselves think about asset classes, there have also been changes in how Dutch pension fund clients need to be serviced and how they want to talk about their portfolios. I believe that this is driving a couple of trends: changes in how fiduciary managers are organising their own teams (Integrated Portfolio Management is an example), and an increase in outsourcing by fiduciary managers.

Another important factor is resourcing. As an investment company we have about 40 people running EUR 25 billion for our clients. In my opinion this is a pretty ‘lean and mean’ number but it does mean that we have to think carefully about the organisational structure and operational risks. If we have two equity portfolio managers and one goes on holiday, for instance, then we may have a problem. With a more integrated team, there are more people involved with each of the various areas.

Q: Could you explain a little more about changes for pension funds in the Netherlands and how that’s driving change in the fiduciary management landscape?

One of the key trends in the Netherlands is that members of Boards of Trustees are being encouraged or even 'forced' by the regulator to own their decisions. You cannot delegate responsibility for those decisions to the fiduciary manager. If there is a move to add private credit, for example, you have to understand the risks and how the asset class fits into the asset/liability picture. There are professional board members who do this for a living.

As a result, fiduciary managers must do more: educate board members in more detail, give advice, manage the portfolio, do regulatory reporting, communicate with (and answer to) a very large number of stakeholders. We see a shift from the term ‘Fiduciary Manager’ to ‘Fiduciary Partner’ to reflect that the provider is acting as a partner for the board member to help them make their own decisions. The workload puts pressure on the fiduciary management model: there isn’t time to do everything.

The provider is acting as a partner for the board member to help them make their own decisions.

This has helped to drive fidicuary managers to outsource parts of the process, as mentioned earlier. You could think of it as a shift away from product management – doing everything yourself – towards using different providers while focusing on your value-add and communication. It’s an interesting transition from a people management perspective. Traditional portfolio managers are used to doing things themselves – with their own models, systems and research. Portfolio managers who are very focused on the portfolio may potentially lack the communication and presentation skills to help board members understand their decisions.

Another important development with big consequences for Dutch fiduciary managers is the move towards DC. Currently we have a small proportion of DC clients, though this will increase. Fiduciary managers will have to provide visibility to each participant. This results in a new group of clients to communicate with: we’ll have more than 150,000 individual clients who don’t necessarily have investment knowledge but want to understand what’s happening. We’re developing a portal and thinking about what we’re going to include there in the future, such as a chatbot with AI who can answer participants’ questions, for example. We’re building it ourselves because there isn’t much ‘off the shelf’ and we want a specific look, feel and customer journey.

The way we manage the portfolio will also shift, since the regulatory framework for DC doesn’t encompass a funding ratio. In theory this gives more choice to invest in things like private assets and exotic products, since clients are not restricted by a funding ratio risk framework. In practice, however, the DC framework requires a lifecycle approach and that tends to push you out of private markets because of liquidity constraints: assets are moving from one bucket to another over time. My expectation has changed from what it was two or three years ago: I am now expecting that DC clients will probably have similar or lower exposure to private assets than DB. One issue that may affect this is whether impact investing (which is quite private equity focused) takes flight in the Netherlands.

With DC we also have to think carefully about our approach to pooling assets. We already pool the money from clients into vehicles; now we have to think about trying to pool the pools of our clients.

Q: How interested are your pension fund clients in ESG and impact investing?

To be honest, our clients typically became more interested in ESG matters after their parent companies started to focus on it, and they were skewed by their thinking on their own sectors (e.g. transport, energy). As time has gone by there has been a renewable of board members, which has really helped us to think about ESG.

Nowadays we even see pension funds competing against each other to get higher in ESG rankings. Many are building frameworks and policies at the moment. Many funds were quite pre-occupied in 2023 with a volatile market and a new regulatory framework, but I’m convinced that in 2024 we’ll see movement into strategies focusing on impact, biodiversity and more.

I’m convinced that in 2024 we’ll see movement into strategies focusing on impact, biodiversity and more.

In our case we’ve already got investments in renewables, climate transition benchmarks and so on. We have built a team of three ESG experts. We’re also integrating ESG into our frameworks for manager selection and monitoring, as well as into strategic asset allocation. This is not always straightforward, especially for senior personnel who have been working for 20-plus years. The ESG team has a great deal to do. Reporting requirements are going through the roof. The data side of ESG and impact has changed a great deal. The improvement in data providers is transforming policy, with board members able to use actual KPIs on Sustainable Development Goals. We use FactSet, amongst others, and we’re thinking about buying extra data.

Q: You’ve been Head of Portfolio Management at Blue Sky for the past seven years and in the industry for 25. What would you say are the most important lessons you’ve learned in your journey?

My career has been very diverse over the past 25 years. I started in risk management, then worked in portfolio management, equity management and asset allocation before joining Blue Sky, where I first worked on tactical asset allocation before my current role. With that said, I like thinking holistically about investment management.

One of the lessons I’ve learned, and perhaps the one I’d start with if I could give advice to myself a few years ago, is: don’t underestimate the human factor. This is a people business, not a numbers business. I’d been quite a numbers-focused person – after all, I ran quant models at ABN AMRO. Don’t neglect that team members are humans who want to enjoy their work. It’s really rewarding to build a team, think about how they interact, different types of PMs and how you can connect them

The second lesson, perhaps, is that the only constant is change. There is no year that is the same as last year. The company, the strategy, the regulations, volatility, market trends all move on. We must continually evolve as well.