DENMARK - The DKK62.8bn (€8.4bn) Lønmodtagernes Dyrtidsfond (LD) reduced the equity exposure in its main investment fund by almost DKK1.7bn last year, in an effort to limit risk.

Figures from the LD pension fund's annual report for 2007 showed the fund achieved an invest return of DKK1.2bn, equivalent to a money-weighted return of 2%, although the return after tax was 1.7% compared to 8% in 2006.

Overall, the report showed the return on equities dropped from 18.3% in 2006 to 1.2% in 2007 which, the fund claimed, reflected a lower return on Danish and foreign listed equities.

At the same time, the fixed income portfolio returned 1.4%, compared to 1.2% in 2006, while property investments delivered a yield of 31.3%.

Members of the LD scheme have the option of investing in the balanced fund LD Discretionary Investments, in six internal pools managed by the in-house firm Fondsmæglerselskabet af 2004 (FMs 04 Asset Management) or in four pooled funds managed by external Danish mutual funds.

LD Discretionary Investments is the largest investment fund, as it holds 91% of the fund's overall assets and 88% of member savings, and is required by legislation to invest at least 30% of its assets in gilt-edged assets, primarily government or mortgage bonds, with the remaining 70% can be allocated to higher risk assets such as equities.

That said, the LD supervisory board, which oversees the investment strategy of the Discretionary Investments portfolio, established a framework to reduce risk which limited allocations to equities and other non-gilt-edged securities to just 57% last year instead of 70%.

As a result, 58% of the discretionary investments fund was invested in government and mortgage bonds at the end of 2007, while 8% was allocated to other bonds, and just 26% was invested in listed equities, along with 4% in unlisted equities and 4% in property and other assets.

The report revealed the pension fund invested the liquidity from the securities portfolio cash flows into gilt-edged bonds, especially Danish mortgage bonds as it deemed the risk return ratio for these was "still attractive", while this portfolio also reduced the fund's holdings of higher risk, higher-yield, corporate and emerging markets bonds.

The largest change was in LD's equity holdings as the discretionary portfolio disposed of DKK1.7bn in listed equities, of which DKK1.2bn was in Danish equities and DKK457.4m were in overseas shares.

LD said its reason for the disposal was a "general wish not to increase the proportion accounted for by equities and, with that, the risk exposure attached to LD Discretionary Investments' asset allocation". 
The largest disposals were in companies such as Møller-Maersk and Danske Bank, while in the overseas portfolio the disposal focused on Japanese, US and Finnish equities, although it acquired shares in German and Swedish companies.

Since the 2004 amendment to the LD Act, which allowed members to transfer out of the scheme to another pension provider or bank, the discretionary portfolio has sold DKK 22.1bn of equities and investments, which means equity exposure dropped from 52% at the start of 2004 to around 30% at the end of 2007. 

LD is a closed state pension fund established by the Danish government in the late 1970s to manage the accumulated allowances that were supposed to be paid to employees to offset inflation, but which the government decided to pay out as a supplementary lump sum at retirement.

The fund received just over €1bn in contributions from the government in 1980 to be distributed between 2.5 million member accounts, and although no further contributions have been received since 1980 the fund has increased to over €8bn as investments achieved an average annual return of 10.8%.

At the end of 2007, LD had DKK59.8bn in member assets, and DKK62.8bn in overall assets, although member assets were lower by DKK2.8bn as the investment returns were lower than the payments made to members.

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