PKA, the DKK195bn (€26.1bn) administrator for five Danish pension funds, is to expand a pioneering equity investment management strategy put in place in 2012 to a range of other asset classes during 2014.
The funds began to adopt a strategy designed to get exposure to specific risk-premia and ‘market effects’ in equities two years ago, in collaboration with a number of investment bank and asset management advisers that included Deutsche Bank, JP Morgan and AQR.
Instead of simply allocating long-only to traditional global, regional or sector equity portfolios, PKA’s strategy combines developed, emerging, frontier and small-cap mandates with around 15 alternative sources of risk and return.
These include premia extractable from dividends risk, merger risk and implied volatility risk, factor exposures such as value and momentum, and other market ‘effects’ such as the low-volatility anomaly, and they are implemented using long/short strategies and derivatives.
Implementation of the new strategy was completed towards the end of 2012.
During 2013, the traditional equity risks returned 22%; the alternative risks, 13%.
The funds’ investment portfolios (excluding liability-hedging) returned 9% overall in 2013.
Now Jannik Teigen Hjelmsted, a senior portfolio manager at PKA, has revealed to IPE that the funds are set to expand some aspects of this approach into rates, currencies and commodity markets.
“Last year, we did a big study internally to see if it is possible to get exposure to value, carry, momentum, volatility arbitrage and the low-volatility effect in other asset classes,” he said.
“The high-level conclusion was that we do see those return sources outside equities, and we are now working on ways of getting exposure to them, building on the experience we have working with equities to create an even more robust portfolio.
“With the same overall risk budget, we think we can earn a higher return for the total portfolio by having exposure to these new return sources.”
He added: “We have some strategies in commodities and currencies already, but, on the back of this study, we will expand those and ramp them up for a more meaningful contribution to the returns of the fund.”
In many ways, these new markets lend themselves naturally to the strategies PKA has been applying to equities.
Most have deep and liquid derivative markets, and, as Teigen Hjelmsted pointed out, most are also risk-management markets.
Unconstrained investors can be well-compensated by other market participants looking to lay-off their risks, and those risks often have low correlation to traditional return sources, he said.
The same risk-transfer concept underlies several of the premia PKA seeks out in its equity portfolio, such as dividends and volatility risk premia.
“PKA’s investment committee has approved a re-allocation of risk budget to these new strategies, and we expect that, by the end of 2014, we will have most of the strategies in place, as we complete the due diligence on each of them,” Teigen Hjelmsted said.
“As with the equity risk premium project, we expect implementation to take about a year.”