Nordic Region: Diversification desired

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Nina Röhrbein reviews the recent asset allocation and mandate activity of Nordic pension funds

In the current low interest rate environment, pension funds in Nordic countries are pursuing greater diversification in their portfolios.

As some of the mandates reported by show, the focus seems to be on regional or emerging market equities and alternatives. However, fixed income continues to dominate pension fund portfolios.

In Denmark and Norway local fixed income makes up on average 60% of pension fund portfolios, according to Kirstein Finans in Copenhagen.

In Finland almost half of the exposure of pension fund portfolios consists of international fixed income (see separate article in this section). International equity and local bond and equity portfolios make up the rest of the allocation.

Sweden typically is geared towards equities. Portfolios hold on average 37% equities, both domestic and international in nature. They contain an average 33% exposure to domestic fixed income, while international fixed income makes up 18% and alternatives account for 12%, says Kirstein.

“If we see any movements in the asset allocation of Nordic pension funds this year, it will be on the alternatives side, which we expect to slightly increase compared to last year,” says Casper Hammerich, senior investment analyst financial market research at Kirstein.

“The great rotation from safe haven bonds back to equities is too simplistic a concept because pension fund investors are in fact pursuing bank loans, specialised bonds as well as various types of alternatives, such as property and infrastructure, in order to maximise their expected returns and meet the required return targets, in addition to equities.”

As the allocations by PensionDanmark show, infrastructure is as popular for Nordic pension funds as it is for other European investors. In Denmark, property investments are particularly attractive to investors, which the mandates by Industriens Pension and PKA demonstrate.

On the equities side, Hammerich has witnessed an increase in demand especially for stable and high-dividend equities as an alternative to low-yielding bonds, as seen in the mandate by Danish pension provider PKA.

“In the search for yield in equity markets, investors have to be more risk-seeking to generate the yield that is absent from the traditional equity markets,” he says.

“Therefore we have seen a shift from global emerging market equity mandates to more regional emerging market equities. In addition to the regional flight, some investors also target the small and mid-cap segment. We have noticed a trend away from large caps to small and mid-caps. We see, for example, demand for US small caps and Asian mid caps.”

Danish financial services group Nykredit tendered a $125m (€96m) US small and mid-cap equities mandate last May, while Danske Capital tendered a $75m (€57.6m) US mid-cap equities mandate in the autumn of 2012.

A Swedish insurance company meanwhile tendered a $50m (€38.4m) large-cap Chinese equity mandate in October last year, while an asset manager acting on behalf of three Danish pension funds issued $125m (€16.8m) worth of Japanese equity mandates and a $100m Latin American equity mandate early last year.

In reaction to low yields and an increased attention to maximising return, Hammerich has also noticed demand arising for internal management or even index products. This can been seen in the passive mandate by the Danish Teachers Pension Fund, the Laerernes pension fund.

“Some pension funds have started to invest in equities or bonds themselves in order to avoid having to pay high fees for a return they believe they can achieve themselves,” Hammerich continues. “This favours more uncomplicated fund set-ups and more simplified portfolios in relation to risk, investment resources, selection of active managers and other issues.”

The looming regulation of Solvency II is not reflected in the asset allocation of Nordic pension providers just yet. “They are trying to prepare for it but one of the statements that a lot of investors have given us is that they think the regulation is called Solvency II because it always seems to be two years away,” Hammerich concludes.

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