Casper Hammerich outlines some of the key findings on asset allocation from the ninth Nordic Investor Survey
Institutional investors continue to face challenges, not least from demands for both high alpha and cost minimisation. Given this paradox, some investors have turned towards more opportunistic allocations within equity and fixed-income as they seek to balance the cost of alpha.
In effect, one of the drivers of current portfolio construction and asset allocation in the 2014 Nordic Investor Survey has been a reassessment of the elements of traditional asset allocation. What initially began as a search for yield within traditional asset classes has evolved into an exploration of opportunities in innovative asset classes, such as unconstrained credit mandates, frontier emerging markets equity and long-short hedge funds.
During 2013, the share of equity increased by three percentage points to 28% of total assets, which was driven by a shift from local fixed-income to international equity. With an unchanged share of international fixed-income, the overall allocation to fixed-income decreased by four percentage points to 56% of total assets.
Norwegian and Danish investors continue to allocate around three-quarters of total assets to fixed-income, although the share of local fixed-income has decreased in favour of international bonds. The share of alternative investments reached an all-time high at 16% of total assets with increasing allocations in Norway and Sweden. Finnish investors continue to allocate close to a quarter to alternatives. In Denmark, the declining values of interest rate derivatives has had a negative effect on the overall allocation to alternatives in Denmark.
Increasing allocations to equity in 2013 are explained by investors’ continued search for yield outside high-grade fixed-income. Despite static allocations to regional equities, Finnish and Swedish investors have increased their allocations to European and North American equities. In Sweden, the AP funds are driving this increase, while the general allocation to equity remains fragmented. Nonetheless, a renewed belief in the euro-zone as well as the higher perceived growth potential in North America has bolstered these allocations.
In line with lower interest in emerging market equity, allocations have reduced compared with last year as investors have cut exposure. In light of a less than stellar performance in 2013, a number of investors have begun to rethink their emerging market equity allocations and are looking for more opportunistic investments, in global frontier markets, for example. In addition, some larger investors with established exposure to global low-volatility are moving towards less volatile emerging market equities. Danish and Norwegian investors in particular are leading the interest in global equity, which increased in 2013 relative to emerging market equities across the region.
The overall allocation to fixed-income remains close to two-thirds, although overall interest is decreasing. This decline can be linked to narrow credit spreads, high volatility and the possibility of rising interest rates. Some investors are using a barbell approach to fixed-income, combining specialised credit to the existing high-grade bond allocation.
Where investors last year moved slowly out along the risk curve, there seems to be a mentality of ‘stay ahead of the curve or stay out’ nowadays. The management structure of emerging market debt is, in the same way as equity, influenced by the desire for rethinking allocations – for example, back to hard currency from traditional local currency mandates or into blended mandates. In this period of low-yielding fixed-income markets, some investors are finding unconstrained fixed-income strategies an attractive way to broaden their options, reduce exposure to credit beta as well as have the opportunity to invest across the entire capital structure.
Our research suggests that the high allocation of Nordic investors to fixed-income is in part due to the unsettled situation of their portfolios in relation to inevitably rising interest rates. Although a positive correction in interest rates could take considerable time, many investors have become focused on how to actively manage duration as well as on finding a flexible way of playing sub-investment grade investments. In this regard, bank loans and short maturity bonds have served as an appealing stepping stone, not least for Swedish life-insurance companies.
The share of alternatives has increased to a high level, not least driven by increasing allocations in Finland, Norway and Sweden.
On an aggregate level, allocations to private equity have increased across the region and the allocation to private equity and real estate now constitutes close to three-quarters of the investments in alternatives. The value of private equity increased notably in Denmark and Finland during 2013, although real estate continues to make up the largest portion across the entire Nordic region.
Infrastructure projects have been popular in recent years, although some investors have curbed their enthusiasm. The largest investors are already fully invested and some suggest that Danish wind-farm investments, in particular, are literally dead. Limited supplies of feasible projects combined with a high demand from an increasing number of investors are dramatically shrinking the alpha potential.
Although hedge funds have historically been a Finnish and Swedish phenomenon, investors have been interested in the asset class as an attractive, yet opportunistic way of capturing high alpha while reducing beta, in relation to credit investments.
So whereas asset allocation appears relatively stable, investors are constantly rethinking portfolio construction as they seek to minimise costs without giving up yield and as they wait for interest rates to rise.
Casper Hammerich is a senior investment analyst at Kirstein Financial Market Research in Copenhagen
The 2014 Nordic Investor Survey may be purchased by contacting firstname.lastname@example.org. Subscriptions for the 2015 Nordic Investor Survey are now taking place.
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