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The pension fund of chemical company DSM has bought a few hundred million euros worth of gold in recent months, it writes Financieel Dagblad. According to the trade journal PensioenPro the fund now holds 5% of its assets in physical gold, which is stored in Switzerland with a financial institution. According to the pension fund, the precious metal provides more diversification. It can also contribute to a better return, because the risk of the total investment portfolio decreases.
DSM's pension fund manages assets of approximately €7.7 billion. This means that she has added approximately €400 million worth of physical gold to her portfolio. The fund withdrew 10% of its assets from government bonds and put it into stocks, real estate and infrastructure investments in addition to gold. The fund expects these alternatives to deliver higher returns than government bonds in the coming years.
Initially, negative interest rates on government bonds were not a problem for DSM's pension fund. It meant a significant rise in the price of the bond portfolio, but now that interest rates are stabilizing at a very low level and even rising again, there is little return perspective in government bonds. The interest rate on government bonds of developed countries has been very low to negative for some time now. This would mean that the pension fund would no longer be able to make a return on government bonds in the long term. That's why she decided to revise her investment strategy last year, resulting in the addition of gold to the investment portfolio.
Although the precious metal does not generate interest or dividends, so do government bonds. In addition, the precious metal adds diversification to the overall portfolio, especially in times of stress in the financial markets. Gold has also achieved excellent returns over the long term, averaging about 8% on an annual basis over the past fifty years. So there is something to be said for including some precious metal in the portfolio for the long term.
However, it is not common for pension funds to invest in gold. When the Pensioenfonds Vereenigde Glasfabrieken decided in October 2009 to put 12% of its assets under management in gold, it was reprimanded by the Dutch Central Bank. According to the central bank, which supervises the pension funds, it was not responsible to hold so much gold. This is despite the fact that the central bank itself has tens of thousands of gold bars in its vault.
At the beginning of 2011, the pension fund was ordered by DNB to sell a large part of its position in gold. As a result, it missed out on a few billion euros in returns, for which the fund ultimately received no compensation. Since then, no pension fund in the Netherlands has dared to hold a significant position in the precious metal. However, there now seems to be a turnaround, because now that the first sheep has crossed the dam, more may follow. We are curious to see how the Dutch Central Bank will react to this, now that government bonds also yield virtually no return and pension funds have to consider other investments in order to achieve a return.
This contribution comes from Geotrendlines
