The Icelandic pension fund sector is undergoing parallel developments that are having a direct impact on the management of its assets.
The first is an ongoing process of consolidation, which has gradually reduced the number of pension funds from an original 100 to a current 48 and which is anticipated to result in an eventual 20 as the pensions sector pursues economies of scale.
And there have been signals from the local markets. Despite their continuing strong performance there has been a month-long expectation that the local stock market is due a correction. In addition, a fall in interest rates following a change last year to Housing Financing Fund regulations had a knock-on effect on the local bond market. Meanwhile, analysts are predicting that the strong Icelandic kronur will begin to weaken.
The effect of both sets of developments has been to shift the asset allocation focus of pension funds away from domestic markets to international markets.
“The business is getting so big that there is simply is not enough stuff to buy here,” says Tryggvi Thor Herbertsson, a member of the board of Frajalsi, the pension fund of KB Bank, Iceland’s largest financial institution. “The funds have been moving abroad instead of biding up the local markets.”
“The e320m open pension fund Almenni is expected to merge with the e174m doctors’ pension fund Laekna at the beginning of January. “Both have similar asset management, but there are slight differences,” says Gunnar Baldvinsson, who is the fund manager of both. “We will use this opportunity to review the strategy, take the best from each and merge it into one good strategy. And hopefully we will be able to strike a better deal with international asset managers. Almenni already has a large portion of its assets abroad, a little more than the doctors’ fund. We assume the merged fund will be somewhere in the middle.”
A similar exercise is already under way at Gildi, the €2.03bn fund which is the result of the merger earlier this year of unskilled workers’ scheme Framsyn and the seamen’s fund Sjomanna. Framsyn had outsourced asset management to local firm Joklar but this has been brought in-house. In effect as Framsyn had been one of its three owners this took a third of Joklar’s business out of the company at a stroke.
“We have not yet started the process of selecting the outsourcing managers but now the fund has doubled in size we expect to get more advantageous prices from international asset managers,” says chief investment officer Tryggvi Tryggvason.
And market developments are having an impact. “We have not seen any correction in the Icelandic stock market, it’s still gong strong but obviously people are aware that the growth has been rapid and prolonged and the expectation is that there will be a flattening of the curve,” says Pétur Adalsteinsson of small local independent asset manager VBS Securities. “A lot has been happening in the bond market, with the issuance of ISK100bn of Icelandic kronur-denominated bonds by some European banks and the Austrian government. While that has probably delayed the expected weakening of the kronur, it has probably ensured that when it happens it will be steeper than otherwise. But looking two years ahead we will see a weaker kronur, which is probably why there is a focus abroad.”
And international players are feeling the effect. “Within recent months we have seen pension funds coming to us and saying ‘we talked about this last year, now is the time to do it’,” says Peter Preisler of T Rowe Price. “So we are in the process of putting mandates together up there. We are not the only player; we see competitors in the market.”
“We manage money for several Icelandic pension funds and are in constant touch with the pension fund community,” says Rick LaCoff, senior vice-president at global investment manager Payden & Rygel. “There are a number of reasons why Icelandic domestic investors are looking abroad. The first is diversification and, because their rates are traditionally so high, the hedging rates of pension funds that buy global securities and hedge them back into kronur is very attractive from a yield-hedge pickup.
“Previously they looked towards the US but now a lot are more comfortable opening to the euro because everyone is getting worried about the twin deficits in the US,” LaCoff adds. “But increasingly we’re seeing an MSCI world-type investor, where they are not targeting a particular region but they want global diversification. And although fixed income was traditionally has been domiciled domestically, over the past three years we have seen a growing transition into foreign bond markets.”
The new kid on the block is Dexia Asset Management, which earlier this year opened a branch in Stockholm to target Sweden, Finland, Norway and Iceland. “We are in our research period and it is clear that in Iceland, like in other markets, there is a drive to find diversification, learning from what has happened in the recent past with the equities market,” says Fredrik Wilkens, head of Nordic institutional sales at Dexia. “With the strong run that they have experienced it’s quite natural to examine whether it is a growth that can be expected to continue longer term, and I think that is driving interest in foreign managers.”