At the Juristernes & Okonomernes Pension Fund (JØP) the search for alpha is on. The DKr21bn professional fund for lawyers and economists is undergoing an extensive restructuring.
A full review is in hand, says Henrik Franck, investment director, who joined the fund from BankInvest last year. “Not only is the choice of managers being reviewed, but the structure of the fund.” Here the focus is on how far to rely on active management or indexation.
“Some years ago, the fund outsourced all its equity management. The outcome from this has not been satisfactory, as we have not obtained any alpha from that. We picked the wrong managers or the right managers in the wrong area!”
The first step is reviewing every area the fund has investments. “We are looking at every single manager we have – but no decisions to terminate anyone has been taken.” For this task of selecting European and global managers, JØP has appointed Danish consultancy Kirstein Finans and its international partner FondsConsult after a search that included the largest firms worldwide. Franck and his investment department are participating in the screening process.
“Our aim is to find managers who can add alpha,” he says. “We are looking for 1 to 2% annually from the enhanced indexed core of the portfolio. Then we will have a satellite portion, where the managers are expected to produce 2 to 5% annually.” The split is 65% core and 35% satellite.
The satellites are areas where the fund can actively allocate to those funds. A tactical asset allocation(TAA) overlay type strategy is being implemented with Danske Capital under an advisory mandate. “Our aim is to use this resource as an integral part of our approach and try to run it as if it was an internal department of our own.” Asset allocation was an expertise of Franck when at BankInvest.
The funds strategic asset allocation benchmark is 25% equity, 65 fixed income and 10% real estate. “Currently, we are somewhat overweight equities, underweight bonds but with an overweighting in the bond portfolio of high yield.”
The largest proportion – 80% - of the real estate portfolio is in residential properties. This may reduce overtime to 70%. The fund invests itself or co-invests with other funds through limited partnerships. “For commercial properties the aim is to hold directly and indirectly. While we have not gone outside Denmark, this is on the radar screen.”
The fund used a number of hedging arrangements to steer clear of trouble and the solvency position is now very healthy, he says. “Our equity allocations never went below the 21 to 22% range, enabling us to maintain relatively high equity exposure. We were able to weather the traffic lights with this level, which meant that when equities started to perform again, we were very well positioned.” The fund is in the process of selling off the interest rate hedges it put in place – at a good profit, he adds.
While the fund has different rates of guarantees ranging from 2.25 to 4.25% annually, in fact it pays all members the same 4.25%, whatever their legal entitlements. One of the steps being considered is to have a fund with a zero guarantee that just safeguards the contributions and give members the option to use this. “That would enable us to have a less constrained investment process. If you are a new 22-year old lawyer, do you really want 65% of your savings invested in fixed income?”