Nordic Region: Continued caution
Henrik Hoffmann-Fischer outlines the key findings of the seventh Nordic Investor Survey on asset allocation as Nordic investors search for yield
Attempting to find yield in a low-yielding environment – without straining the risk budget to unsustainable levels – is one of the foremost drivers of current asset allocation and portfolio construction. The Nordic region is no exception. But whereas some investors are exploring opportunities through increased risk, most investors remain cautious in the face of uncertainty driven by continued concerns for the evolving euro-zone crisis and a market characterised by structural volatility. Looking at the changes Nordic investors have made to their asset allocation one gets a sense of the challenges facing institutional investors in the region.
During 2011, Nordic investors’ equity allocation decreased from 30% to 25%, representing a reduction in both local and international stock allocations. As a result, equity allocation is now 11% lower than before the financial crisis. Conversely, the allocation to fixed income has increased from 57% to 60% of total assets, a move primarily driven by Finnish, Norwegian and Swedish investors. The share of alternative investments has risen primarily due to the higher value of derivatives in Denmark.
The substantial decrease in the equity allocation over the past year, is explained by investors increasingly attempting to curb portfolio risk. More than 80% of the Nordic investors have reduced their equity exposure, with the largest Finnish and Swedish investors taking the lead. Data from Danish, Finnish and Swedish investors show that within the developed equity portfolio, the allocation to European equity has decreased, whereas the allocation to North American equity has increased. In spite of high structural interest in emerging market equities, some Nordic investors have in fact decreased their exposure at the benefit of developed regions.
The structural volatility in equity markets has prompted some investors to look at the opportunities for yield within the fixed income bucket. On average, Nordic investors now have 60% of their portfolio allocated to fixed income. In response to the euro-zone sovereign debt crisis, many investors have chosen to exclude the PIIGS countries and allocated more to northern European bonds as well as the US investment grade sector, and investors continue to explore opportunities within the broader international credit space. Our research shows that the increased allocation that Nordic investors have to fixed income is in part due to an increase in the allocation to local fixed income, not least in Norway and Sweden. This could be driven by the strong performance of local fixed income markets.
The share of alternatives increased from 13% to 15%, although this mainly reflects changes in the value of derivatives, not least among some of the large Danish commercial pension funds. Private equity and real estate investments continue to be substantial and constitute more than 70% of the investments in alternatives in Finland and Sweden. Norwegian investors have moved in the opposite direction, and slightly decreased their allocation to alternative investments to around 9%.
On the one hand, Nordic investors continue to seek simplicity and transparency in their portfolios, which goes against a greater allocation to alternatives. On the other hand, some investors seeking yield in a low return environment have nevertheless indicated an increasing interest in alternative asset classes.
So although asset allocation appears relatively stable, multiple factors ranging from transparency, simplification and focus on costs to finding higher yield within the constraints of a given risk budget, indicate that asset allocation is in fact being impacted from many different sides.
Henrik Hoffmann-Fischer is senior investment analyst at Kirstein Financial Market Research
The 2012 Nordic Investor Survey is available now and may be purchased by contacting email@example.com or +45 33 18 99 63. Subscriptions for the 2013 Nordic Investor Survey will take place in November 2012.