INVESTMENT RISK MANAGEMENT

AT APG ASSET MANAGEMENT

Daniel Notermans, MD Global Investment Risk Management

Dirk-Jan Funken, CFA, Senior Risk Manager

Maria Weitzer, CFA, Senior Risk Manager

September 25, 2019

TABLE OF CONTENTS

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1. APG Asset Management

2. Risk Management Function within APG AM

3. Risk Management for Alternative Investments

at APG AM

1. APG ASSET MANAGEMENT

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Snapshot of APG Asset Management

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Leading global, long-term, responsible investor.

AUM per April 2019

€505 BN

GLOBAL

750 investment

professionals

worldwide

(Amsterdam,

Heerlen, Hong

Kong, New

York)

ESG

Leader in

responsible

investment

practices for

more than a

decade.

SCALE

Part of largest

pension

administrator

in the

Netherlands

and Europe

Clients: Dutch pension funds

Investing for our clients for 25+ years

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1993-2005 2005-2010 2010-2015 2015-present

• In-house active investor

• Multi-asset

• Global investment strategy

• New York and Amsterdam offices

• Equity platform growth

• Corporate Governance policy

• ‘Ont-zaffing’, Multi-Client

• Reorganized COO, Allocation & Research, Equities platform

• Innovation committee

• Hong Kong office

• Pension fund investing (smart beta)

• Start Transformation

• Implementation Multi Client

• Treasury Center

• Controlled simplicity/ internalized investing

• Structured Quant investing

• ESG focus

• Restructured fiduciary model

• Growth in-house Private-Equity

• Client focused, result driven

• Growth Hong Kong office / LOI E-Fund

Profile: long term, active, in-house investor

Responsible investment policy

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ESG is an integral part of the processes at APG.

Our investment belief: sustainable investments will outperform in the long-term.

Responsible Investment Policies

Improve risk-adjusted

financial return

Demonstrate

social responsibility

Contribute to the integrity

of financial markets

ESG is an integral part of all

investment cases. ESG compliance is

assessed by both First line and

Second line functions.

Strengthening governance and

oversight at portfolio companies by

exercising our shareholder rights.

Measuring and improving the ESG

performance of our portfolio.

APG actively uses its shareholder

rights (engagement) and enters into

dialogues with companies.

ESG focus is in alignment with our clients: In October 2018 the Dutch Association of Investors for Sustainable

Development (VBDO) awarded our largest fund (ABP) and our second-largest fund (bpfBOUW) the highest

possible five-star rating.

Asset classes in APG portfoliosPortfolios are diversified across a variety of asset classes to generate good, stable

returns in various market environments. Each asset class exhibits a unique level of

complexity that needs to be managed.

Developed

Market

Equities

Commo-

dities

Emerging

Markets

Debt

Inflation-

linked

Bonds

Treasuries

Credits

Emerging

Markets

Equities

Capital Markets

Alternative Investments

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Hedging

Tactical

Asset

Allocation

Strategic

Asset

Allocation

APG AMCLIENTS

Real EstateInfra-

structure

Hedge

Funds

Private

Equity

2. RISK MANAGEMENT FUNCTION

WITHIN APG AM

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Positioning of risk management CFRO/IRM

Gathering & customization of and

reporting on information deliverables

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Strategic Portfolio

Construction

Asset & Liability

Management

1st LINE 2nd LINE

Strategic & Tactical

Overlay

Asset Classes

Treasury and

Trading

Investment

Committee

Information exchange to internal and

external stakeholders via reports,

meetings and Q&A

InformationDeliverables

InformationDeliverables

CFRO/IRM

CFRO/IRM

CFRO/IRM

CFRO/IRM

CFRO/IRM

CFRO/IRM

CFRO/IRM

(R)evolution of risk management

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PAST PRESENT FUTURE

Compliance &

control function

Active &

independent

risk management

function

Further

enhancement of

risk management

framework

Based on CRFO vision, IRM acts as strategic business partner to PM and FM, providing

a “helicopter view”, expert opinion and countervailing voice.

Global team

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Global presence of the risk team matches the global investment mandates of APG AM

• Risk processes and tasks

structured and standardized

taking a global perspective

• Management and collaboration

across borders

• Coordination of asset classes

• Data assurance, quality checks,

and performance management

• Roles: supervising, investigating,

advising / opining, administrating /

reporting

Fiduciary framework

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APG AM

• strategic advisor

and single point of

contact for clients

• independent of

portfolio

management and

risk function

• equally positioned

as portfolio

management and

risk function

• independent,

countervailing and visible

risk function, responsible for

checks & balances towards

the fiduciary and portfolio

management function

• equally positioned as the

fiduciary and portfolio

managment function

• acts within mandate of

fiduciary function

• equally positioned as

fiduciary and risk

function

• responsible for 1st line

risk management

Portfolio management, 2nd line risk and fiduciary function working together respecting each others’ roles

Board + Committees

Executive Office

Fiduciary Management

Client

Risk Management Portfolio Management

IRM current scope of responsibilities

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• Set risk policies and framework

• Review and assess new investment proposals by providing risk advice

• Play active roles in risk committees and committee on investment proposals

• Develop and maintain ongoing risk management and monitoring tools for all asset

classes

• Conduct performance measurement and monitoring

• Conduct operational due diligence on all investment proposals

• Perform investment mandate compliance monitoring

• Conduct risk modeling, model validation and data visualization

• Perform risk management and monitoring on ALM, strategic portfolio construction,

investment decision plan and client risk management

• Conduct risk management and monitoring of ESG and RI related matters

IRM key deliverables

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Process Deliverable

CIP Process Independent risk assessment resulting in

advice report on any new investment proposal

Client Asset Risk opinion on status of an asset class in terms of

Class Review risk, return, costs, investment strategy,

investment pace, client portfolio fit

New Product Independent risk assessment resulting in

Approval Process advice or opinion on new investment

instruments, products or (sub)strategies

Fiduciary Management Risk opinion on fiduciary management advice

Advice Requests

Risk management reporting

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IRM produces regular, comprehensive client and asset class reporting for all

stakeholders involved: Management Board, Portfolio Management, Fiduciary

Management and clients.

Semi-annual asset-class

report

Top-down portfolioanalytics

Manager scoring heat

maps

HFMonthly

Performance(%)

S&P 500TR:

Equity

BarclaysUS Baa

overTreas(%):

Credit

5Y StripReturn(%):

Rates

-4 -2 0 2

-20

-10

0

10

-20 -10 0 10

-10

-5

0

5

10

-10 -5 0 5 10

-4

-2

0

2

4

Data source: APG, NHC, Bloomberg

HF Portfolio & Systematic Factors

3. RISK MANAGEMENT FOR

ALTERNATIVE INVESTMENTS AT

APG AM

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Committee for Investment Proposals (CIP) process

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Identify potential investment and

prepare investment proposal

Portfolio

Management

Risk

Management Legal ESG

Evaluate investment proposal

and provide unconditional,

conditional or negative opinions

Committee on

Investment ProposalsReview proposal and opinions and make

decision about making the investment

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2

3

Risk management for alternatives

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Some uniform challenges

• Relative complexity and uniqueness of investments and structures

– Need for extensive risk due diligence to understand investment, operational and enterprise risks

– Specialized skills required to analyze certain asset classes

• Portfolio and mandate fit

– Understanding the role of alternatives in the overall portfolio and clients’ appetite for alternatives

• Valuation

– Understanding of manager’s internal valuation policies and procedures

– Independent oversight and reviews

• Liquidity

– Changes in liquidity in normal market conditions vs. times of distress

• Leverage

– Understanding impact of leverage in different asset classes

• Hedging aspects (FX, interest rates)

• ESG and reputational risks

Risk management for alternatives

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Real Assets

• Investing in real assets

Real assets exhibit characteristics that make them a great fit for a pension fund

portfolio:

– Attractive historical returns

– Low correlations to capital markets asset classes

– Longevity of assets

– Income generation in addition to capital gains

• Risk management areas of focus

– Risk profiles of real assets are very diverse

– Market place is highly competitive

– Deal structuring is critical

– Financing and leverage utilization are deal-specific

– ESG and RI

Areas of ongoing development

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• Further development and implementation of second line client risk management and monitoring

framework

• Progressing from performance measurement towards performance analysis

• Implementation and improvement of treasury and trading risk management and monitoring

(best execution, market risk, liquidity risk, counter party credit risk)

• Enhancement of a model validation framework and process

• Further utilisation of risk management and monitoring tools

• Standardisation and calibration of risk identification process

• Further development and implementation of a RI risk monitoring framework

• Maintaining production of high quality deliverables

• Retaining and recruiting the right talent to match the complexities of APG’s risk management

approach

Risk management adding value

• Partner to other business units within APG

– Provide an independent view

– Contribute additional insights due to our unique oversight role

– Bring a “big picture” perspective to discussions

– Serve as an additional advisor to the board of directors

• Benefits to our clients

– Review client and portfolio fit at an early stage

– Review underwriting assumptions on new deals

– Ensure ongoing compliance with mandate and investment guidelines

– Provide an additional level of assurance that the firm acts in clients’ best

interests

– Pension fund clients having more control

• Industry collaboration

– Sharing our views and practices

– ESG leadership

– Deal partnership21

IRM offers a holistic approach and combines high level “helicopter” view with bottoms up

understanding of strategies and asset classes .

THANK YOU!

QUESTIONS?

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General disclaimer

This presentation is for informational purposes only, is current as of the date noted and should not be used or taken as business,

financial, tax, accounting, legal or other advice, or relied upon in substitution for the exercise of your independent judgment. For your

specific situation or where otherwise required, expert advice should be sought. The views expressed above are not necessarily the

views of APG US or any of its affiliates and should not be deemed as a recommendation to purchase or sell any securities or

investments mentioned. Although APG US believes that the information contained above has been obtained from and is based upon

sources APG US believes to be reliable, APG US does not guarantee its accuracy and it may be incomplete or condensed. APG US

makes no representation or warranties of any kind whatsoever in respect of such information. APG US accepts no liability of any kind

for loss arising from the use of the material presented in this publication. Past performance is not indicative of future results.

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