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Danish fund reverses stance on foreign equity

Foreign listed equities are again being targeted by Denmark’s DKK600bn (€80.5bn) statutory pension fund ATP, having sold off all such holdings two years ago. Since then, the listed equities portfolio has consisted of only domestic shares. ATP’s CIO Henrik Gade Jepsen says that, in the long term, the fund will focus on building up its foreign equity exposure.

Low bond yields and scant return prospects for many other investments have prompted the fund to look to other countries. “When you are in a world of low expected returns, you need to look at investment opportunities globally,” he says, although he adds ATP will not be hurried into making big foreign investments.

Back in the second quarter of 2011, the fund decided to de-risk the portfolio across asset classes. This was achieved by selling the most liquid elements in its portfolio, foreign equities, since the Danish equities market is not particularly liquid.

“In down markets, all markets tend to fall in synch, so it’s not so important where you own equities but rather how many you own,” Gade Jepsen says. “But we were also sure that, at some point, we would take on more risk again and at that point build the foreign portfolio back up.”

Jan Willers, partner and head of financial market research at Danish consultancy Kirstein, says ATP’s plan is part of a more general move by the country’s pension funds to look abroad.

“There is a relatively high level of interest in increasing international equities exposure – to emerging markets but also to some of the developed markets,” he says. These investors are aiming to diversify risk, he says, adding that the shift is also a sign of optimism about the existence of good international opportunities.

However, ATP’s move to sell all foreign equities was not typical of Danish pension funds. “Others chose to rebalance their equity portfolios, and none of them was that big in Danish equities anyway, although it’s true they do still have fairly significant allocations to the domestic market. Mostly, they invest in Danish equities due to familiarity and historical high returns, but also as a small-cap bet.”

However, the lack of geographical diversification in equities has done ATP no harm, says Gade Jepsen – Danish equities delivered superior returns in that period. “It was a very good decision to be in Danish equities, as they have performed much better than a diversified foreign portfolio,” he says.

Could this mean the illiquidity of the Danish equities market potentially cushions investors in a market crash? No, says Willers. “In 2008, one of the big lessons from the crisis was more focus on liquidity – on alternatives, but also on equities,” he says. “It became clear that it was important to be able to get out when needed.”

ATP is not the only Nordic institution to have retained its domestic equities while selling its foreign ones. In Finland, some pension insurers also had a significant proportion of domestic equities, while losing international shares, Willers observes.

The high level of domestic holdings among Finnish pension insurers is because of their desire to support the local economy, and also because they are owned by Finnish companies, which they, in turn, support by investing in them. This is not the case with ATP, although, as an institution that is state owned, investing in the domestic economy is popular.

In general, though, home bias in equity portfolios has been decreasing steadily in the decade or so to 2010 in major developed economies. Data from MSCI and the IMF show that Denmark, Finland and Norway made more progress in this respect than the UK and the US did. In a report last year for the Norwegian ministry of finance, MSCI warned against home bias in portfolios. It argued that, since asset growth was the big goal of equity allocation, there could be huge opportunity costs in allowing the domestic market to dominate.

 

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