Getting a regional view
An important issue throughout the Nordic region is investor expectations of future asset allocation. While the general picture resembles last year’s survey, some trends are more pronounced. Most investors prefer to reduce their allocation to local asset types. Equity price increases are playing an important part as well as the small-cap nature of the local equities, with a few remarkable exceptions. This may pose a problem in current and possible future market conditions.
The survey reveals that there are no major regional differences in the attitude to local equities. Most Icelandic investors continue to expect large investments in equities, although some have predicted that, sooner or later, the Icelandic stock exchange will be integrated into the OMX. If that happens, they would consider changing the equity mandate structure to get a broader Nordic portfolio. An integrated Nordic stock exchange is anticipated rather than a local and a Scandinavian market.
Talking to investors it is quite obvious that the expected increase in international equities will take place within emerging markets in various regions and segments.
When looking at fixed income, we previously predicted that structural factors would change the nature of international bond investments, both as a result of a general internationalisation trend and of interest in a more absolute and alpha-orientated management in general.
Generally, there is considerable interest in international bonds. Danish and Finnish investors show the most interest. However, global bonds are a major exception, having attracted the attention of Norwegian investors who are quite interested in high-yield bonds and emerging market debt. The opposite is happening in Denmark and Finland. Icelandic investor interest in international bonds has dropped. Higher domestic interest rates have diminished their interest in international fixed income and they are investing in Icelandic inflation-linked bonds.
A majority of Nordic investors expect to increase their exposure to alternative asset classes. However, there are some minor changes compared with last year. Finnish interest in private equity seems to have cooled, yet interest in private equity is more or less as high as last year in the other Nordic countries, not least Iceland where all the larger pension funds seem to have invested in the asset class.
Conversely, interest in hedge funds is highest in Finland. This is in accordance with the increased risk appetite of pensions funds following the implementation of the Puro Commission’s proposals. Danish investors are lagging somewhat.
It is worth noting that, while last year three out of four Swedish investors expected to increase their allocations to hedge funds, this year they have become much less interested, with two out of three investors expecting allocations to be unchanged.
On private equity and hedge funds, the investors prefer fund of funds but it is very characteristic that the larger investors prefer single funds and this is the general trend. We are certain that this will strengthen further as the market for alternative investment matures. The investments in single funds to a large extent are with local providers.
In all countries apart from Sweden there is also a healthy appetite for increasing allocations to real estate. This is fund rather than direct investment-based. At the Nordic level, the interest in global and regional mandates is evenly distributed. The proportion of those that prefer global mandates has dropped. However, this has not benefited regional mandates. The number of investors that build up style-defined and sector-driven portfolios has increased.
It is particularly striking that 4% of investors indicate that an international mandate is partly built up through sector mandates. This may be due to a wish to practice tactical allocation among the individual sub-mandates - an approach that may be said to make sense in a sector context. It is worth noting that the largest investor in the Nordic region, Norway’s Government Pension Fund - Global, and one large Danish public fund use sector mandates extensively; at the same fund time it underlines the fact that it presupposes a certain size.
Icelandic and Norwegian investors invest mostly in global mandates though, compared with last year, the proportion of investors that use global mandates has decreased substantially in both countries. More investors indicated that they find having style-defined mandates important. In Iceland it is used to diversify the broad mandates and value managers are doing good business in Iceland. Some, particularly Danish, investors are focusing on mid and small-cap equity mandates, which are considered more inefficient.
Alpha-beta separation is still an important issue among Nordic investors. Much of the alpha management is about investing in products that operate in an absolute-return environment, typically with a money market-related benchmark; it may be hedge funds but also absolutely managed long-only bond products.
There is an apparent tendency for some of the large bond houses to introduce this kind of product. These investments are not a reflection of alpha-beta separation but rather of just a (beta) investment in products with a short benchmark and a high alpha objective. It is mostly minor and mid-size investors that practice this form of alpha search. If alpha and beta are separated, there is usually an exposure to asset classes in the beta management, which may be achieved using derivatives as well as cash investments, and this type of management may paradoxically add alpha.
Jan Willers is financial analyst at Kirstein Finansrådgivning. The Nordic survey can be purchased by contacting him at firstname.lastname@example.org or by visiting www.kirsteinfinans.dk