Danish pension funds “not looking at long term”

DENMARK – Newspaper reports that Danish pension funds’ equities holdings have fallen to 14% are causing concerns that the funds are not concentrating on the long-term.

According to one Danish newspaper report, holdings in Danish equities have fallen to 14% from around 44% in 2002 as a result of sell-offs and falling market values. Although consultants disagree that the figure is as low as 14%, the reduction in the allocation to equities is seen by many as worrying.

The fear is that pressure from regulators regarding asset-liability matching is making funds blinkered in their approach, and that they are now just looking at risk levels and not returns.

Using data produced by Dimson, March and Strauton which shows global investment returns since 1900, Bankinvest has plotted the differences in real returns of Danish mutual funds with a 50% equity and 50% bond allocation against those with an allocation of 15% to equities and 85% to bonds over the next thirty years.

Based on past real returns, the charts show that, if you invested 100 Danish crowns today with a split of 50% in Danish equities and 50% Danish bonds, you would receive the equivalent of 314 crowns in today's money in 30 years time as a result of a 4.6% return compounded annually.

If this same amount of money were invested with 15% in Danish equities and 85% in Danish bonds, the outcome would be only 264 crowns. When compounding a higher
rate of return over a longer period of time, it can be seen how much better off funds end up with more invested in equities.

Comments Daniel Broby, chief investment officer at Bankinvest: “In the current environment many people are questioning the long term case for equities. Historic data produced by academics, such as Dimson, stretches back over a century and includes two world wars as well as the great depression.

“Pension funds have to remain fixed firmly on the long term and the evidence still points to the fact that equities out-perform bonds over such a time horizon. However bad the world appears today, the primary duty of pension funds is to provision for pensions tomorrow.

“They should therefore increase equities as markets decline; not the opposite as is happening in Denmark today. The regulations are well meant but poorly thought out and detrimental to the long term interests of the Danish workforce.”

Bankinvest is the third largest manager of Danish pension fund assets worldwide, according to Mercer Investment Consulting.

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