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Vacatures in Institutioneel Vermogensbeheer
Frank Meijer
Geplaatst: 24-10-2014

Investing in mortgages gives a high and stable return on investment

Interview met Frank Meijer - Head of ABS Fund, Covered Bonds and Mortgages AEGON Asset Management

Frank Meijer from Aegon encourages pension funds to invest more in mortgages. This will increase returns and lead to risk diversification.

Frank Meijer is Head of the Aegon ABS Fund (that invests in Asset Backed Securities), Covered Bonds and Mortgages at Aegon Asset Management. In that role he has worked on the firm growth that Aegon as a mortgage provider has experienced in recent years. It is striking that an increasing share of the capital comes from pension funds.

Meijer: "Investors focus on three groups: organisations, governments and consumers. Traditionally pension funds hardly have direct exposure to consumers or none at all. They mainly invest in government bonds and in corporate shares or bonds. The return on government bonds has never been very high and nowadays it may even be called quite low. For Dutch and German paper we speak of one percent at most. Some countries offer a slightly higher return, but these bonds are not wholly risk free. The unpredictability of the return of investing in shares is not something I need to explain. We see almost daily how volatile the developments of the stock market are. In comparison the return that you can get on Dutch mortgages is very attractive. Both in terms of the height of the returns as well as stability. The return on our mortgage portfolios is constantly approximately 4%."

If we may believe the reports this is also far from risk free: the number of people that have difficulties paying their mortgages seems to be growing. "To determine the risk of the mortgage portfolio you should not initially look at such statements, but quantify the cool numbers and then it turns out that on the investments only two base points per year, or 0.02%, need to be written off. Thus the risk is very limited. Let’s sketch a very somber theoretical scenario and assume that the un-collectability increases with a factor ten, even then we speak of a very small risk and the return remains 4% minus 0.2% which equals 3.8%. Many times higher than that of government bonds. This is why I plea for more investments by pension funds in mortgages. It increases the return on the portfolios and leads to risk diversification."

Does Meijer find resonance for this appeal? "To an increasing extent. At Aegon, for instance, we have developed concrete possibilities. We have set up a fund in which pension funds can invest. This fund, called AAM Dutch Mortgage Fund issues mortgages. We started last year in August and have almost raised three and a half billion Euros, practically all from pension funds. This way, together with the money for mortgages that Aegon issues for its own balance, we have formed a nice mortgage pool. As said before, the investment risk is very low, more so because it is spread over many, many thousands of mortgages."

Thus we can speak of two trends: pension funds discover the Dutch mortgages as a lucrative form of investment and insurers continue their advancement in the mortgage market at the expense of the traditional bank lenders.

"The latter trend is stimulated by the European regulation. Solvency II makes investing in mortgages interesting for insurers, because mortgages have an attractive illiquidity premium and at the same time relatively limited capital requirements. For banks the regulations work out differently. They are required to keep large buffers for loans with a long fixed income period. Contracts that last approximately thirty years are less suited for banks who would rather issue credit with a term of five to seven years.

And yes, we definitely see it as a breakthrough that Dutch pension funds are directly investing in mortgages. This is a relatively new phenomenon and I daresay the beginning of a trend that will continue. And that is not strange considering that pension funds previously invested in mortgages, be it in covered bonds and securitisations. These choices were made because these mortgage packages were noted on the stock exchange and could be exchanged daily. However, the return did not exceed respectively 0.6% and 1.4%. Compare that to the return that can be achieved by directly investing in mortgages and it is clear that the institutional investors, including the pension funds, will increasingly make this choice."

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