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Nordic pension funds magnify focus on unlisted and direct investing, building up teams

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As bond yields remain at low or negative levels, pension funds and other institutional investors in the Nordic region are stepping up efforts to find higher returns by adding more unlisted investments to portfolios and are expanding in-house teams in order to do this, according to new research by consultancy Kirstein.

In its latest annual Nordic Investor Survey, the firm found several trends that are continuing and becoming more pronounced in the investment behaviour of pension funds and life insurers in Denmark, Sweden, Norway and Finland — all aimed broadly at maximising returns in a low-yield environment.

Casper Hammerich, investment consultant at Kirstein in Copenhagen, told IPE: “Everything investors are now doing stems from their hunt for yield; they are searching very intensively, and have come to the conclusion that if they are going to get the returns they need, then they need to look at alternatives.”

Researchers documented that the institutional investors across the board were not only continuing to shift their assets towards unlisted investments and away from listed ones, but that these moves were intensifying.

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“Investors are scaling up internally in order to have the resources to do this themselves., This trend is led both by investors’ hunt for yield, but also, and maybe more importantly, led by investors continued search for lowering fees.” Hammerich observed.

Some of the larger investors in the region are intending to double their exposure to alternative investments, he said.

“When we look at the assets of the portfolios of these investors, large portions of them are going from the liquid side to the illiquid side, and this also means they are shifting from being transparent to less transparent, and this is a very interesting theme,” he said.

A second theme revealed in the research is that investors are showing more of a preference for bespoke products when it comes to services from external managers, than they are for standard solutions, he said.

“It can be very difficult now for managers to sell these off-the-shelf, plain-vanilla funds to investors,” Hammerich said.

“Institutional investors are now focusing on the internalisation of asset management as well as regulatory aspects, and as a consequence, many have less time to focus on external management,” he said.

This to a large extent excludes the “less interesting” managers, he said.

Other themes highlighted in the survey are the moves from indirect to direct investments, from restricted benchmark mandates to broader, unconstrained measures and from beta mandates to ‘true’ active alpha mandates.

On the trend from restricted benchmark mandates to broader unconstrained mandates revealed in the survey, Hammerich said that where external managers are used, pension funds and other institutional investors are looking for those managers who have the expertise to do, for example, several different types of fixed-income investments in a single mandate.

He added: “Making the allocations themselves between grades of bond investment has proved difficult for many investors and hence they would rather have their managers do this.”

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