Henrik Hoffmann-Fischer outlines key findings on asset allocation, as well as trends on global versus regional mandates, based on the sixth Nordic Investor Survey

In the Nordic region, overall equity allocation increased from 28% to 31% at the end of 2010. While the proportion of international fixed income has decreased from 22% to 19%, the proportion of local fixed income and alternatives has remained stable. For the most part, investors have scaled back their investments in alternatives in a continued effort to reduce risk in their portfolios. Investors in Sweden, on average, had a modest increase in allocation to alternatives.

Investors in Denmark are still rather cautious, and the share of both international and local equity in the portfolios remains more or less unchanged.

The overall allocation to local equities in Finland remained the same as last year. However, Finnish investors have increased their allocation to international equity significantly during the year, not least due to an increased appetite for emerging markets equity.

Norwegian investors increased their allocation to international equity to a greater extent than they increased their allocation to local equity which, in turn, somewhat decreased the very high local-equity bias. Even so, for the average investor local equity still comprises above 60% of the equity portfolio.

Swedish investors have the highest overall allocation to equities among Nordic investors and during the year we witnessed a further increase in allocations to both local and international equity.

Nordic investors expected their asset allocation to remain unchanged last year. This suggests that investors were reluctant to make substantial strategic changes. While an extensive use of derivatives might explain the rather limited changes in asset allocation, it is nevertheless the case that some of the Nordic investors, for example in Finland, have taken a more dynamic approach to asset allocation, making tactical and semi-strategic changes to their portfolios. Generally speaking, however, Nordic investors are still seeking to simplify their portfolios.

The number of investors expecting to maintain their current allocation to local and international equity has increased significantly over the past three years. This tendency is even more pronounced than was the case in 2010. Those investors that expect to increase their international equity portfolios are drawn to emerging markets. There is a continued high interest for global equity, albeit at a lower level compared with last year. On the other hand, we do see an increasing interest for regional mandates, partly motivated by the need for dynamic asset allocation. Generally speaking, uncertainty related to Solvency II means that some investors are holding back on new initiatives.
Danish investors continue to have a high allocation to North American equities, although allocation decreased slightly during the year, while emerging markets equity allocations were increased at the expense of European equities. Finnish investors have decreased their relative exposure to Japanese, European and especially North American equities, due to the heavy increase in allocation to emerging market equity.

Overall, investment structures are still, to a great extent, global in their approach, although some of the predominately larger investors are considering leaning more towards regional mandates. Although the interest for global equity seems to have waned a bit compared with last year, some investors promoted the idea of a core of global equity, based on expectation of managers generating alpha in different markets, supplemented by satellites of local and emerging markets equity more or less corresponding to the weight in the MSCI All Countries index. Satellites could also involve other specific regions or sectors, such as dedicated Asia exposure. Still other investors argue that in a world where capacity for the global emerging markets equities managers is shrinking, it is wise to consider how to structure emerging markets equity, whether by looking at the next tier, or through a regional play. When it comes to emerging markets, some investors indeed make the case that a regional approach might be better, where the local managers may be sharper.

In general, Nordic investors maintain a high allocation to local fixed income, and Danish and Icelandic investors have close to 60% allocated to local fixed income. The allocation to international fixed income decreased somewhat, mainly in Finland, although Finnish investors have the highest allocation to international fixed income.

As a direct consequence of the European debt crisis, several investors have terminated or reduced their allocation to southern European bonds and allocated more into northern European bonds or non-European bonds of similar credit quality. Investors are diversifying their international bond portfolios in order to diversify risk in different markets and, not least, to pursue new return opportunities. Emerging market debt allocation has been steadily increasing, especially among Danish and Finnish investors, and some investors now have close to 10% of total assets allocated to emerging market debt.

Nevertheless, the interest for local fixed income continues to dominate and is supplemented by international investment grade due to its capital categorisation in relation to Solvency II. Danish and Finnish investors have increased their interest in high yield, whereas the interest in emerging markets debt continues to be widespread in the Nordic region.

Fixed income structures differ significantly between the Nordic countries. The most experienced investors in Denmark and Finland primarily use fairly segmented structures in their international investments, with dedicated mandates on a number diverse markets, European corporate bonds, US high yield, bank loans, emerging markets in different shapes and forms and so on. Norwegian and Swedish investors are more inclined to use broader mandates - ie, global investment grade - in some cases supplemented by satellite mandates in emerging markets bonds or high yield.

The share of alternatives has decreased from 13% to 12%, reflecting changes in the value of derivatives. The allocation to private equity within the alternative portfolio continues to increase in Denmark and Sweden. Some Finnish investors have scaled back on their real estate investments.

The interest for alternatives is affected by capital requirements in relation to Solvency II, hence the interest for hedge funds continues to be very low. The interest for private equity increases and some investors are seeking inflation protection through infrastructure and real estate. Generally speaking, uncertainty related to Solvency II means that some investors are holding back on new initiatives. Nevertheless, the number of expected new mandates has increased compared with last year.

Henrik Hoffmann-Fischer is a financial analyst at Kirstein Financial Market Research

The 2011 Nordic Investor Survey is available now and may be purchased by contacting
henrik@kirsteinfinans.dk or +45 33 18 99 63. Subscriptions for the 2012 Nordic Investor Survey will take place in January 2012