Real ambition

Nina Röhrbein asked Benny Buchardt Andersen, CIO at PenSam, about his fund’s aim to target future purchasing power and how it will achieve this

Pension funds have a reputation as cautious investors who take a long time to make decisions on anything from asset managers to asset allocation.

However, events over the last few years have forced many to spring into action, some more so than others. One that has made rather big moves is Danish pension management company PenSam.

Its target in pension terms is high real income. “We have an inflation-targeting vision,” says Benny Buchardt Andersen, CIO at PenSam. “Our strategy is about risk tolerance and investing for higher returns without taking too much risk. But although we have a target to achieve higher purchasing power in the long term, in practice we cannot guarantee that. The expected return today is 4-4.5%, which is reflecting the world we are in.”

Put into practice, this means that PenSam has a strategic asset allocation of 30% listed equities, 5% private equity, 5% real estate, 5% illiquid credit and 7.5% each in high yield bonds and emerging market debt.

The remainder of the portfolio is made up of traditional government and mortgage bonds.

“We have a very strong focus on the return,” says Buchardt Andersen. “But we also have a view on risk in the world and a view on what the peer group is doing.”

By aiming to invest 30% in listed equities, PenSam belongs to the group of risk-taking Danish pension funds that do not offer a guarantee.

Its risk tolerance is defined by a top-down and bottom-up perspective. The fund is split into two sections – a low risk and a higher risk portfolio.

“We started on 1 January last year with a 10% allocation to equities,” says Buchardt Andersen. “Our current exposure stands at 18-20% so 2013 saw a significant increase in risk in the equity portfolio, and we are on course to reach 30%. At the same time the use of interest rate hedges and liability hedging has been significantly reduced.”

The main reasons behind the increase in equity investments are PenSam’s solvency level and risk budget, which have grown substantially during the last couple of years. And there may be room to take more risk. A positive view on markets and a bearish view on rates, meanwhile, led to a reduction in liability hedging.

The investment portfolio is monitored by PenSam’s risk management department, and the upper and lower limits are set in a way that allows for market fluctuations but also for the fund to hold onto its strategy.

“When the risk exceeds the upper or lower risk budget limits, we have a discussion about whether the strategy should be changed or maintained,” says Buchardt Andersen. “But the limits are realistic and not only reflect downturn risk but also the positive outcomes of the upside risk. So, despite the big moves in our asset allocation, the way we measure risk has not changed.”

PenSam’s portfolio is reviewed at least annually. In addition, each month, there is a discussion with the CEO as to whether the current strategy works and whether it should be changed.

In 2013, the board was advised twice to increase risk, which it did on both occasions.

“It is an increasingly dynamic play but as long-term investors we can also maintain a strategy without being forced to sell,” says Buchardt Andersen. “Our capacity for risk is large and there is an ongoing discussion on whether that should be used more aggressively in our investments. In fact, the main trigger for us to go to the board is the ever-increasing risk budget, which is a strategic reason rather than a tactical one.”

The strategy to increase the equities and alternatives portfolio and internal active management was decided in 2010. As a result of the adoption of this strategy, according to Buchardt Andersen, performance increased substantially, both with regard to absolute and relative returns.

PenSam’s equity portfolio is global in nature and managed by external investment managers.

“However, it is a double strategy,” says Buchardt Andersen. “It is close to being a passive strategy with an enhanced mandate. In other words, while the external managers are tracking companies, PenSam uses internal tactical management as a second layer incorporating its views on different regions, sectors and derivatives to generate alpha. During the financial crisis external managers that were supposed to produce a lot of alpha ended up producing negative alpha, which put us under pressure. We have a strong view on what constitutes alpha and what constitutes beta in the equity portfolio – and over the last few years the estimated 1.5% outperformance, as opposed to the 1% generated by the best external managers between 2010 and 2013, was mainly a result of internal management decisions.”

PenSam is also increasing its involvement in its private equity portfolio, which primarily holds US and European investments but which also includes Asian private equity. To date, PenSam is mainly invested in external funds and private equity funds of funds, but has started to make decisions and co-investments with the vehicles, initially as a style point but in future also potentially at the fund level.

While the company’s strategic allocation to real estate is 5%, in fact it is heading towards 10% exposure. “At the beginning of the financial crisis we increased our investments in real estate by entering the US,” says Buchardt Andersen. “Despite receiving decent returns with our property investments in the US and Europe we have since returned to a domestic bias. Danish direct investments make up 50% of the real estate portfolio, which we manage in-house with a target yield of 10%.”

During the financial crisis, PenSam moved into high yield bonds where the beta return seemed attractive and since then it has spotted pockets of affluent high yielding areas in illiquid debt. Today its illiquid portfolio contains high-yield non-listed credit, including senior bank loans, mezzanine loans, direct lending as well as pockets of distressed secondary Danish real estate and distressed consumer credit, which are increasingly managed in-house.

“We increased our internal resources in direct lending by adding bank credit expertise to our team last summer,” says Buchardt Andersen, who expects to increase the high yield bond portfolio over the next couple of years. “The board needs to approve it first but we think the risk is fair now, which is why we are moving into illiquid credit and investment grade bonds,” he says.

The increase in the equity and alternative portfolios has come at the expense of PenSam’s traditional fixed income portfolio.

“We have reduced our 70% allocation to traditional fixed income to approximately 35% today,” he says. “And although I expect it to remain at this level it could potentially be cut even further. Diversification is the key to our asset allocation.”

The internally managed active Danish government and mortgage bond portfolios have produced around 70bps outperformance year-to-date to October 2013, which Buchardt Andersen attributes to their alpha-beta split.

“We capture alpha risk premia and leverage them up in a separate asset portfolio, which is producing these returns,” he says.

PenSam continues to increase its efforts to move management in-house because of the outperformance it has created on the back of it.

“We will add to the number of people working in active management both on a strategic and tactical level,” says Buchardt Andersen. “We will have to be extremely focused on creating outperformance in the future because after two good years in equity markets, future returns and consequently pensions are going to be lower. In short, for us, active management equals outperformance. We aim to be passive only in the pockets where we feel it is right to be passive, such as long equities. But being tactical in equities will definitely add value to the portfolio and we can leverage pockets of risk premia within different kinds of strategies.”


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