The pension fund of chemical company DSM has bought several hundred million euros worth of gold in recent months. According to PensioenPro, the fund now holds 5% of its assets in physical gold, which is stored with a financial institution in Switzerland. According to the pension fund, the precious metal provides more diversification. It can also contribute to higher returns, because it lowers the risk of the total investment portfolio.
The DSM pension fund manages assets of approximately €7.7 billion. This means that it has added around €400 million worth of physical gold to its portfolio. The fund took 10% of its assets out of government bonds and swapped those assets for gold, equities, real estate and investments in infrastructure. In the coming years, the fund expects these alternatives to provide higher returns than government bonds.
Negative interest rates
The negative interest rate on government bonds was initially not a problem for the DSM pension fund. It meant a considerable increase in the value of the bond portfolio, but now the interest rate is stabilizing at a very low level and even rising slightly, the upside for government bonds is limited. The interest rate on developed market government bonds has been very low to negative for some time now. This means that the pension fund would, in the long run, no longer be able to earn a decent yield on government bonds. It therefore decided to revise its investment strategy and to add gold to the investment portfolio.
While the precious metal does not provide interest or dividend, the same is increasingly true of government bonds. Moreover, the precious metal adds diversification to the overall portfolio, especially in times of stress on the financial markets. Gold has also produced excellent returns over the long term, averaging around 8% annually over the past 50 years. So there is convincing evidence for including some precious metals in the investment portfolio for the long term.
Pension funds invest in gold?
Yet it is not common for Dutch pension funds to invest in gold. When Pensioenfonds Vereenigde Glasfabrieken decided to put 12% of its assets under management in gold in October 2009, it got a warning from De Nederlandsche Bank, the Dutch central bank. According to the central bank, which supervises pension funds, it was not responsible to hold that much gold. Meanwhile, the central bank itself has tens of thousands of gold bars in its vault.
At the beginning of 2011, the central bank forced the pension fund to sell a large part of its position in gold. As a result, it missed a few billion euros in returns. The fund demanded compensation, but eventually the central bank didn’t pay any compensation. Since then, no pension fund in the Netherlands dared to hold a significant investment position in the precious metal. The decision by the DSM pension fund could change this, because more funds will now consider buying gold. We are curious to see how the Dutch Central Bank will react to this, now that government bonds are also yielding virtually no return and pension funds must consider other investments to achieve a return.
This article was originally published in Dutch on Geotrendlines.nl