At the end of 1999 the Danish Pension sector – inclusive of the public funds ATP and LD – had total assets of more than DKK1,132bn (e148bn) of which 37.5% was invested in equity (see table 1). But the figures exclude the pension funds of corporates, for which there is incomplete data. They are thought to have assets of around e6bn.
In Denmark, pension funds’ investment in equity have so far been constrained by a maximum limit of 50% of total assets, which has resulted in relatively low returns compared to countries where equity form a larger part of total assets. The Danish government has recently put forward a proposal for a change in the legislation, which will allow the pension funds to invest up to 70% of their assets in equity.
According to the proposal, the right to do so, however, will be decided individually by the financial authorities based on the pension funds reserves, risk management procedures etc. The rules have not so far been defined in detail.
It is clear that an increasing proportion of total investments in equity is allocated to the foreign markets, and at the end of 1999 more than half of total equity investments was placed abroad. This is explained partly by the rise in the prices of foreign equity but also by an active reallocation out of Danish into foreign equity.
One of the reasons for this is the relative illiquidity in most Danish shares where only a few has a large enough volume to accommodate substantial transactions. Another reason is that an increasing number of the Danish institutional investors adopt a sector view – as opposed to a regional view - in their equity investments.
This tendency has no doubt continued in 2000 even though the Danish equity market has performed extremely well this year.
Bonds still comprised more than half of the total assets at the end of 1999, but the share has primarily as a consequence of the increasing share of equity been constantly falling since the beginning of the decade. The proportion of foreign bonds has so far been limited, where most investors have seen spreads being in favour of Danish bonds.
In the last few years, however, investors have taken an interest in foreign bonds and this year investments in eurobonds and high yield bonds seem to explode. There is no doubt that Danish pension funds are trying to internationalise their bond portfolios along the lines of the equity portfolios.
The flip side of this is, that investments in index-linked bonds have turned negative due to illiquidity and adverse changes in taxation.

A consequence of the increasing investment in foreign assets seems to be, that investors outsource a larger share of their investments, as it is considered too costly to build up expertise on all the different markets.
The composition of assets differ quite substantial between the pension companies. This is partly due to liabilities and preferences but the reserve situation have limited some companies in their investment policies. Thus, the low level of interest have involved some problems for companies which have guaranteed their clients/members a high level of return on their savings. Also on this front the framework seems to be changing in favour of the pension funds, where one of the elements is a lighter taxation of bond investments.
The price to pay will most likely be an increase in the taxation of equity investments from 5–15%.
In 1999 the pension funds on average realised a return of 11.7% after adjusted tax. There were, however, substantial differences between the funds, where the best funds obtained returns of more than 20% and some funds as little as 3–4%. Differences were to a large extent explained by the funds’ share of investments in equity and especially in foreign equity. At the same time the dispersions between returns on investment in foreign equity was exceptional. KP, the pension fund for employees in local authorities, obtained a return of 96.1%, AP Pension reached 87.4%, whereas some investors obtained returns far below the MSCI return of 44.7% measured in DKK.
Tables 2, 3, 4 and 5 show the returns from 1991 to 1999 for the old labour market pension funds, the new labour market pension funds, the academic pension funds and the large commercial schemes respectively.
The differences in performance are huge.
It is significant that performance seems to repeat itself, some funds are systematically better than others. In our opinion good performance involves both the ability to allocate the assets to the most profitable asset types (asset allocation) as well as the ability to create returns on the different asset types. In general these abilities go hand in hand.
In general performance in the Danish pension sector in the past five years has been dominated by the companies willingness and ability to invest in equity in general and foreign equity in particular. But to the surprise of some, the ability to create returns on the individual asset classes plays an important role too, and differences have been huge.
Thus, the best performer on Danish equity in the period 1995 to 1990 has obtained a return, which exceeds the worst performer by 16% points per year, but there are visible differences also on the other asset types, see table 6.
Another way of illustrating this phenomenon is shown in table 7, where the average return on the most important asset classes of the 10 companies with the highest general return is compared with the return of the 10 companies with the lowest general returns. It is clear, that good performers produce higher results not only by their asset allocation, but also by creating higher returns on the individual asset types.
Having said that, however, performance is becoming more uniform in recent years and the sector is showing increasing professionalism.
Jesper Kirstein is managing director of consultants Kirstein Finans in Copenhagen

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