DENMARK - Denmark's PFA Pension made an above-benchmark return on investments of 1.2% in 2007, but has now slashed its equities exposure ahead of the recession it expects to see in the US.

Plans to buy DKK5bn (€671m) of equities have been put on ice, and equities exposure has been cut from 20% to 15%, the DKK213bn labour-market pension scheme said in a statement.

Managing Director Henrik Heideby called the 1.2% return on overall investments, before tax and costs, "reasonably satisfactory" given the very difficult market conditions, and the scheme pointed out this return was 0.2% above its strategic benchmark.

Equities produced a 5.9% return, with overseas shares in particular driving the return up. Bonds returned 0.5% in the year - 0.2% below benchmark - while interest-rate hedging made a significant loss, reducing the overall return by 1.5%.

PFA said it viewed the latest uncertainty and downwards correction of economic growth and corporate profits with growing seriousness.

"The increased risk of a recession in the US was the reason why, at the beginning of December 2007, we suspended our planned purchase of a further DKK5bn of equities," said Heideby.

At the beginning of January 2008, PFA said, it judged the likelihood of a recession in the US had risen to 50%. Since then, that probability has increased again, it said, and now a recession could only be avoided in the best-case scenario.

"In order to minimise our sensitivity to equities, PFA reduced its equities allocation before the latest fall in share prices from around 20% to less than 15% by using financial instruments," the scheme said.

"This gave PFA good protection against the sharp fall in share prices seen in the last few days. By using financial instruments, PFA has minimised the risk without selling holdings," said the scheme's investment director Henrik Franck.

Overall investment return from January 1 to January 21 was around 1%, while the equities negative return for the same period was -11.5%, the scheme said.

"In the long-term, we still believe equities are attractive, because for the time being we do not expect a deep and lasting American decline," said Franck. "Rather, shares are not significantly overvalued, as they were in 2001, when we last had a recession; the opposite is more the case.

"This sets a limit on how much lower share prices will be pushed, but does not prevent a strong upswing in the near-term," he added.

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