Danish pension funds have not only increased their asset allocations to alternative investments in the last year, but, within their alternatives portfolios, the diversity of investment types has grown, according to a report.

Consultancy Kirstein produced research into how Danish pension providers are investing the assets behind their market-rate or defined contribution (DC) products.

It shows that assets such as infrastructure, alternative credit and other alternatives have grown by 1.9 percentage points in 2015 to 16.2%.

The report also identifies two key factors determining returns and the relative performance of the pension firms in 2015 – the regional allocation in the equity portfolio and the attitude towards currency risk.

Emerging market equities have given companies a loss of 5% in 2015, whereas Danish equities generated a 34% return, according to the report.

Regarding currency risk, the US dollar moved strongly against the Danish krone in 2015, strengthening by 11.6%, it notes.

Commenting on asset allocation trends, the consultancy said: “The last few years have been marked by very low interest rates, which has triggered a hunt for returns among investors around the world.”

Alongside the reduction in interest rates, the proportion of high-rated bonds held by Danish pension funds’ DC portfolios has fallen, decreasing by 3.2 percentage points in 2015 to 22.1% in 2015.

“Corporate bonds have become one of the solutions used to create return and made up a large proportion of portfolios in 2012-13, but this share has since diminished,” Kirstein said.

Meanwhile, the proportion of equities and alternatives increased gradually between 2010 and 2015, over a period when the consultancy noted that high-rated bonds had become less attractive.

But most of the increase in alternatives within Danish DC pensions investment over the last six years was driven by the commercial pension firms rather than the labour-market funds, according to the research.

This was because labour-market pension funds were early entrants into the alternative investment sphere, Kirstein explained. 

While labour-market pension funds have not increased their asset allocation to alternatives significantly over the last six years, viewed over a 10-year time frame, the allocation has risen markedly, it said.

“Alternative investments are one of the solutions to finding returns in the current low-interest rate environment,” it said.

“The proportion of alternative investments in portfolios has risen, but also the asset diversity within alternatives portfolios has become greater.”

Real estate and private equity previously made up the largest share of the alternatives allocation, but the hunt for returns has now led to a shift, with infrastructure investments, investments in structured credit and other forms of alternative investment increasing.

Allocations to infrastructure have risen by 300% since 2010, it Kirstein said.

In general, low-risk alternatives with predictable cashflows are in high demand from investors.

“The high demand means there can be a fight for this type of investment,” Kirstein says in the report, adding that this means prices for these investments are being pushed higher.

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