Market volatility and the pursuit of yield have been a concern for pension funds since the 2008 market crash. But while the end of 2014 saw solid equity returns and fixed income holdings artificially inflated by lower yields, the first six months of 2015 saw markets hit by uncertainty over future Chinese growth, culminating in the devaluation of the renminbi. 

China is a mystery to many who are unable to devote the time and resources to understanding how the country is transforming into a middle-income economy, or examine how these changes might impact its established position as a manufacturer of goods for the West. Coupled with uncertainty over Greece’s position within the euro-zone, many pension investors reassessed their asset allocation over the first half of the year.

Niina Bergring, investment director at Veritas in Finland, took a pragmatic view of market events. “We have anticipated the problems in China and Greece and reduced our risk level during the spring,” she said, arguing that China’s economy was not on a “sound basis”. As a result, the pension insurer all but pulled out of the country over the first half of the year.

Valtion Eläkerahasto (VER), the national buffer fund, also identified China as the largest risk, surpassing the turbulence that a widely expected interest rate hike by the US Federal Reserve could cause. “It seems the Fed [rate] increase was a bigger topic some time ago, but now that things are getting pretty nasty in

China and in emerging markets, the potential US rate hike starts to look like, maybe not a marginal matter, but still something of less relevance,” said managing director Timo Viherkenttä.

Viherkenttä, who has only been in the post since June, added that the investment team at the €18.3bn fund sold its holdings in Chinese A shares as the market showed “symptoms of overheating” prior to his arrival. In an effort to maintain stable returns, it is focusing on alternatives, while accepting that the market is hotly contested. 

Denmark’s Sampension will be one of the pension investors with which VER will have to compete, after chief executive Hasse Jørgensen confirmed alternatives would be a growing priority as it sought to increase its exposure, from below 20% to one-quarter of its assets under management. The move, complete with a boost to internal capacity to facilitate it, will see money diverted from areas including private equity to maintain high but stable returns, Jørgensen explained.

Laila Mortensen, Jørgensen’s counterpart at Industriens Pension in Denmark, took the high equity prices seen in late 2014 as a reason to divert funding away from listed assets. This approach, Mortensen said, allowed Industriens’s first-half return of 5.8% to beat its benchmark by 1 percentage point.

But not all Danish investors shied from equity, as ATP’s 31% return from domestic stocks demonstrated. The state pension fund said two domestic companies were big contributors, which helped its investment portfolio generate strong returns. Biotechnology company Genmab rose 56% over the first six months, while pharmaceutical firm Novo Nordisk saw its share price appreciate by more than 38%.

A focus on real assets, with largely predictable cash flows, should ensure many Nordic investors are able to face the challenges and volatility ahead. Despite hopes an agreement on the Greek bailout had been reached, the country still faces an election and uncertainty on who will take ownership of the new agreement. 

Many will question whether the turbulence surrounding China is a fundamental problem as many analysts argue, or simply the result of scarce liquidity during quiet summer trading.