Nordea Life & Pension in Denmark is in the process of boosting its exposure to speculative-grade credit, or high-yield bonds, to perhaps 35% of its fixed income portfolio within the defined contribution (DC) schemes in a bid for equity-level returns but at lower risk.
The Danish pensions division of Nordic banking group Nordea currently has more than 15% of its bond portfolio invested in this type of asset, and has so far sold mainly emerging markets bonds to fund the high-yield buying.
Anders Schelde, CIO at Nordea Life & Pension Denmark, told IPE: “We started late autumn last year, three months ago, gradually moving into this segment.”
“We’re talking about going from something that was around 10% of our fixed income portfolio to something that’s more than one-third, maybe 35%.
“Most of the increased exposure will go into high yield, but we are also upping our exposure to bank loans as part of this move.”
Nordea Life & Pension’s overall investment portfolio in DC schemes in Denmark is currently worth approximately DKK50bn (€6.7bn), with the fixed income portfolio holding assets of just over DKK9bn.
The move into this type of credit could potentially make a significant difference to returns, Schelde agreed, but he stressed that this was not the investment team’s main scenario.
“This year, we don’t think the world will fall into a big dark hole – we don’t think there will be global recession or anything,” he said. “But, on the other hand, there are some quite significant headwinds to the global economy.”
In this environment, he said, the returns on equities are likely to be low, at around 5%, or maybe slightly higher on an optimistic view, but he also pointed out that there was also the potential for bad outcome in equities.
“We’re looking to see where else we can get the same sort of return around 5-6% and maybe at less risk, and that’s what we feel this investment can offer,” Schelde said.
“So far, we’ve been financing this mainly by selling emerging markets bonds more heavily than other things in the portfolio.”
On emerging markets, Schelde was quite negative on the risk/return potential.
“At least on a relative-value perspective, we feel it’s better to be in speculative-grade in developed markets than in investment grade in emerging markets,” he said.
Nordea Life & Pension in Denmark is using up to five external managers to effect the bond portfolio shift.
While the shift is now about halfway through implementation, Schelde said the team would continue to monitor markets and the economic situation, and could still deviate from its planned allocation in either direction.
“[It depends] on where the market goes and where the economy goes, and, of course, we might change our view on things and feel that it’s an even better idea or may be a bad idea,” he said.
“I would say so far it’s not been a brilliant investment because spreads have gone up, and so prices have come down, but when you do a shift of this magnitude, you can never time it, and we still believe in the investment case.”