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Buying Costco, Selling Alphabet, Verizon

The pension fund of Dutch chemicals firm DSM made some interesting moves in the fourth quarter.


Stichting Pensioenfonds DSM Nederland, the pension fund of Dutch chemicals company DSM, had a challenging 2016.

The fund, known as PDN, saw a return of 7.6% but that was bested by the four largest Dutch pension funds. “Did PDN miss a trick?” it asked of itself in the latest annual report. “Definitely not,” was the answer. PDN said its investments have been relatively conservative, a necessary requirement because of its high number of retirees; out of 28,393 members at the end of the year, only 6,513 were actively working, with the rest categorized as pensioners or deferred pensioners. The number of active workers has been falling, as well.

One measure the fund has been taken to counter this trend is accepting employees of companies formerly owned by DSM. “The more members there are in the fund, the lower the costs per member; and the younger the fund is, the more offensively it can invest and expect to achieve a bigger return.”

PDN has 6.874 billion euros in assets with 875 million euros invested in the Netherlands. It had $710 million invested in U.S.-traded stocks as of Dec. 31, according to its latest quarterly disclosure, which also revealed interesting investment moves, including exiting both class A (ticker: GOOGL ) and class C ( GOOG ) Alphabet shares, dumping Verizon Communications (VZ), and initiating positions in Costco Wholesale (COST), Lilly (LLY) and Procter & Gamble (PG).

At Sept. 30, the fund owned 7,410 class A shares and 8,150 class C shares of Alphabet, valued at a total of $15 million at that date. PDN sold them all at some point in the fourth quarter. Perhaps Alphabet, in its 13th year as a publicly traded company, is too long in the tooth for the fund to fit the profile of more-aggressive investments. Yet Alphabet is one of our 10 favorite stocks for this year, one of two repeats from 2017.

Verizon, with roots in a company founded by Alexander Graham Bell 140 years ago, was another investment PDN exited at some point in the fourth quarter. At the end of the third quarter, the fund held 161,600 Verizon shares valued at $8 million. We said in late November that Verizon looked like a bargain.

After a lackluster performance for most of 2017, shares of warehouse retailer Costco surged nearly 14% in the fourth quarter. PDN at some point in that period bought 27,000 Costco shares. The stock reached new highs in December, and we highlighted the company for paying a special dividend last year.

Lilly also caught the eye of the pension fund, which acquired 55,000 shares in the fourth quarter. Owning the pharmaceutical giant likely won’t cause headaches at least in one aspect, as Lilly has filed for Food and Drug Administration approval of a new migraine drug. Approval could come in the second half.

Procter & Gamble, recently ground zero of the most expensive proxy fight ever, was another PDM pick. The fund brushed up on the maker of Crest toothpaste and disclosed owning 91,000 shares at the end of 2017. This year could see a number of changes as activist investor Nelson Peltz takes a board seat March 1.

PDM’s Orwellian motto is “Cooperating for Decent Pension Benefits for All,” but there is genuine contentment in the Netherlands. Its children are the happiest in the world, according to Unicef. Its workers and retirees seem to be up there, as well, and express modest goals in a video produced by PDM. One man contemplates sharing Limburgse vlaai with his colleagues as he enters his golden years.

But not even the Dutch are happy with a return of 7.6%. Heads have rolled. The fund recently cut its board to eight members from 12 “so that it can now make decisions more quickly and effectively.”

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