Leon Verboon
In 2023, both interest rates and inflation caused substantial movements on the financial markets. Thanks to a strong final quarter, SNPS managed to achieve positive returns overall. Leon Verboon, Investment Analyst at Shell Pensioenbureau Nederland (SPN), explains how.
“These positive returns are good news for our participants. Returns are an important factor in accruing a solid pension. For participants who are accruing their pensions, we saw a handsome increase in individual pension capital”, Leon says.
‘Interest rate tool’
Leon continues: “The year 2023 was all about curbing inflation. In 2022, money depreciation hit unprecedentedly hard in Europe and America, among others. Consequently, central bankers of the US Fed and the European Central Bank (ECB) resorted to the ‘interest rate tool’ to cool down the economy and curb inflation. This meant the central banks had already substantially raised interest rates at the end of 2022; this policy continued in 2023. In September 2023, the ECB raised the policy interest rate from 2.5% to 4.5%. The effects of these rapidly rising interest rates were felt by the financial markets. However, raising interest rates did effectively help curb inflation. Eurozone inflation was still 9.2% for 2022 and fell to 2.9% for the entire year 2023 (December figure). At the same time, easing inflation fears in the second half of the year had a positive effect on both bond and stock markets.”
Sentiment, interest rate hikes and financial markets
To curb inflation, the ECB raised the policy interest rate to 4.5% in 2023. Yet there were doubts among investors whether this increase was sufficiently effective in curbing inflation. As a result, the market reckoned with a longer period of higher policy interest rates in their valuations. Leon: “As a result, bond markets recorded big minuses throughout the year, because as soon as interest rates rise, this generally has a negative effect on bond valuations. Likewise, rising interest rates resulted in frequent pressure on stock markets - also because higher interest rates make investing in bonds relatively more attractive.”
Increasing confidence
From October 2023, the market became increasingly confident that central banks were done raising policy interest rates. After all, inflation levels had fallen substantially. In some cases more severely than expected. Meanwhile, expectations about future inflation were close to the target set by central banks. As a result, market interest rates fell very sharply in November and December. Bonds increased substantially in value and, partly as a result of the positive overall sentiment, stock markets showed a very strong year-end spurt.
Strong stock returns and dominance of 'magnificent seven'
For example, the Dutch AEX rose by almost 12% in 2023 and the broad US S&P 500 increased in value by almost 24% (in terms of local currency). Leon: “The share return of the S&P 500 (leading US stock index) was dominated by the so-called ‘magnificent seven’, which are the tech companies Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and NVIDIA. These accounted for more than half of the returns on the S&P 500 and also had a sizeable share in the returns of global shares.”
Were there any events in 2023 the pension fund responded to?
Leon: “2023 was marked by 2 potential crises that the pension fund was very much on top of. First, in March 2023, there was major turmoil surrounding a number of banks, including US Silicon Valley Bank and Swiss bank Credit Suisse. Eventually, a classic ‘bank run’ caused Silicon Valley Bank to go bankrupt and Credit Suisse was taken over by UBS. The pension fund quickly identified the risk of a systemic crisis and how the pension fund was positioned. Based on these analyses, it decided not to take any action.
In addition, the pension fund closely monitored the war between Hamas and Israel and analysed the potential impact on their portfolio. In this case too, it was decided that intervention in the portfolio was not necessary.”
2023 investment results
In 2022, the fund faced negative returns in all investment categories due to rapidly and sharply rising interest rates. This past year, the trend was exactly the opposite: positive returns in all categories with developed markets shares standing out highly positively with absolute returns above 20% over 2023.
These positive returns translated into a strong overall performance of the various Life Cycle portfolios. For example, our Life Cycle portfolio Return achieved returns above 13% over the whole of 2023. Leon: “These positive returns directly provide higher personal pension capital for participants who are currently accruing pension. Unfortunately, due to falling interest rates in 2023, that benefit is not there for pensioners participating in the Collective Variable Pension (CVP). On the positive side, however, the CVP scheme spreads both negative and positive results over a five-year period. Because of this spread, participants who have opted for a variable pension will still get an increase in 2024, thanks to the positive results achieved in earlier years.”
After studying Economics & Business Economics at Erasmus University Rotterdam, Leon worked for Willis Towers Watson for 9 years, including as an Investment Strategist. At the end of 2021, he moved to Shell Pensioenbureau Nederland, where he works as an Investment Analyst.
