Step 1: Asset/liability management
The composition of the optimum investment mix is determined using asset/liability management (ALM) techniques. PGGM advises its client on policy, taking into account future pension liabilities, contributions and indexation. By coordinating investment policy, financing policy and pension policy, we arrive at the strategic investment mix (ALM mix). Working on behalf of its client, PGGM pays close attention to benchmark construction, to ensure the effective implementation of ALM within the client’s investment portfolio.

Step 2: Benchmark construction
Benchmark construction is used to translate the ALM investment mix into operational investment policy, with the aim of compiling the best possible long-term portfolio. We check that the composition of the benchmark is sufficiently consistent with the ALM investment mix. The strategic benchmark, which takes account of allocation to currencies and regions, is the internal yardstick we apply to investment policy.

Step 3: Portfolio construction
The asset management provided by PGGM for its client covers four groups of investment strategies:

• Index strategies (Beta)
• Alternative beta
• Active strategies (Alpha)
• Illiquid strategies (Structured investments)

Index strategies  (Beta)
The aim of the beta portfolio is to generate a strategic return on liquid investments (beta replication) in a cost-efficient manner. Having a separate beta portfolio brings two advantages: better beta management and greater cost transparency. The beta portfolio invests in markets and asset classes in order to replicate as closely as possible the systematic risk on investments in those markets and generate the related return. The asset classes in which the beta portfolio invests are equities, fixed-income investments, inflation-linked bonds and commodities.

Alternative Beta
This category comprises the portfolio of strategies and the long-term asset portfolio. The portfolio of strategies consists of new, alternative investments designed to achieve a better risk/return ratio for the client’s portfolio than can be obtained with traditional investments. The diversified portfolio of innovative investment strategies takes advantage of systematic structural market inefficiencies. The objective of the long-term asset portfolio is to achieve a better risk/return ratio than can be obtained by tracking a market index.

Active strategies(Alpha)
The purpose of alpha strategies is to achieve extra return. The alpha portfolio comprises a group of strategies which take advantage of relative valuation differences with respect to certain predetermined benchmarks. PGGM generates extra return for its client with alpha strategies in selected areas. Separating alpha and beta means that we are not tied to the traditional asset/country allocation.

Illiquid strategies(Structured investments)
This portfolio generates, within certain risk limits, the highest possible absolute return on illiquid investments. The asset classes covered are real estate, private equity and infrastructure.

Step 4: Implementation
In practice, the investment strategies included in the client’s portfolio may be implemented internally or externally. This decision is based on such factors as:

• Which is best able to achieve the objective of the investment strategy?
• Which option best satisfies both PGGM’s and the client’s risk management requirements?