ICELAND - The effects of the credit crunch on the Icelandic economy has forced pension funds to abandon long-term strategy and think 'tactically', the Engineers Pension Fund has claimed.
Stefan Halldorsson, managing director of the pension fund, told delegates at the IMN Scandinavian Institutional Investors Summit in Copenhagen, Denmark, the credit crunch had affected Iceland worse than other other European countries, as demonstrated by a 50% fall in the stock index between July 2007 and March 2008 and a 30% devaluation of the Icelandic Kroner.
As a result, he said pension funds had to "abandon long-term strategy and start thinking tactically", particularly as inflation is currently at 11.8%, as a result of a 6.4% increase in the first four months of 2008.
To combat this short-term crisis, Halldorsson revealed there has been a move towards inflation-protected products - such as treasuries and fixed income assets from 'safe' issuers - alongside a reduction in corporate bonds and other credit products.
In addition, pension funds have started to sell foreign assets, on the basis it would be better to buy them back once the currency strengthens, and the money from this is then being placed into inflation-protected products.
Halldorsson confirmed theEngineers Pension Fund sold "50% of its foreign assets in March", reducing its allocation to foreign equities from 40% of total assets to 20%, while the move back into the sector not expected to begin until later in the year.
He also predicted Icelandic equities will also stay flat for the rest of 2008.
That said, despite the need to abandon long-term strategy, Halldorsson said the impact of the credit crunch had taught schemes to "make changes in the way they react to things", including strengthening in-house analysis and decision-making.
It also highlighted the need for increased flexibility in managed portfolios and tactical asset allocation.
Looking forward, Halldorsson said in the long-term Icelandic pension funds would be looking at increasing their allocation to both alternatives and emerging markets, rather than stay with the traditional overweight position in developed markets.
In particular, he suggested pension funds would move away from global equities towards regional or sector-specific equities, while increased investment in alternatives could include a focus on real estate, hedge funds as well as private equity which has already "taken off".
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