The Danish Pension funds had a rather unusual year in 2000 where the factors determining performance differed significantly from the previous years.
The steep falls on the international equity markets were countered by very healthy rises in the Danish equity market, which – measured by the Total index – rose by more than 18%. The Danish equity market is characterised by having a larger element of defensive – more value oriented – companies, which in 2000 performed far better than the world market as such. This, of course, should be seen in the light of the relatively poor performance of the Danish market in 1999 when international markets soared.
The rises in the international bond markets also effected the Danish bond market, which reported returns of more than 8%. The still important market for index-linked bonds did poorly, however, due to changes in taxation favouring nominal bonds, and it is fair to say, that the institutional interest in index-linked bonds is rapidly waning.
In total, performance in the Danish market was determined primarily by the share of Danish equity as opposed to foreign equity, the share of nominal bonds as opposed to index linked bonds and not to forget the performance in the different markets.
In general, the Danish life and pension funds have performed well in the equity markets in 2000. Thus, it could have been feared, that the high returns in 1999 on the international markets far above market returns, which largely were caused by investing in growth stocks, would have backfired in 2000 where growth stocks plummeted. On average, however, the Danish life and pensions funds obtained a return of –4.7% compared to – 5.9% for MSCI World.
In the Danish equity market, which still is an important market for Danish institutional investors, the life and pension funds averaged a return of more than 24% compared to a market return of 18%. The market favoured an opportunistic investment style where a few companies produced fantastic returns.
Highest return in 2000 was registered by the public fund, LD, which obtained a return of impressive 18.6%, which compares to the average return of 6.2% for the sector inclusive of LD and ATP, which also realised a return above the sector (6.7%) as well as DMP and DSP. Also Topdanmark, Codan and Tryg-Baltica among the large insurance companies obtained returns above average.
At the bottom of the list PKS Pension, B & A Pension and B & T Pension registered negative returns of – 1.2%, which is due to the combination of large investments in foreign equity and index-linked bonds. It should be mentioned however that the long run strategy of these companies have produced good results in a longer perspective. Thus PKS Pension is number three on the list of returns in the period from 1991 – 2000.
It is noteworthy that the Danish institutional investors to a large extent continued with their long run investment strategy in 2000 and very few companies, in fact, had positive
performance contributions from their net investments in 2000. This confirms that short term timing of overall investment changes is a very difficult discipline.
Performance in 2000 has not had dramatic effects on the longer term ranking of the pension funds, where the table shows the top and bottom 10 companies or insurance groups.
It should be mentioned that some of the “open” Tryg-Baltica companies, Tryg-Baltica Invest, Tryg-Baltica Liv and Tryg-Baltica Pension have even higher returns. The relative average ranking for most life insurance groups is caused by the fact that these include old insurances that to a large extent are covered by investing in nominal bonds, which in the long run have been unable to match equity investments.
There are several observations to draw from this ranking. In general the top performers produce above average returns in all periods, which is one of the factors that qualify the companies as “good”, just as the bottom performers tend to underperform in most periods.
Calculated on a risk-adjusted basis these conclusions seem to stick. The companies with the higher returns also produce high risk adjusted returns (Sharpe ratios); thus they utilise their risk exposure more efficiently.
It is also evident, that overall good performance is due to both asset allocation and asset selection within the different asset classes, which is in contrast to some findings. In our opinion, this is a function of the quality of investment managers within the organisation, where the good companies realise that responsibility cannot be outsourced.

As a general observation, outsourcing of most asset classes is on the rise, where the increasing investments in the international markets and the introduction of new asset classes require specialised expertise.
At the end of 2000, nominal Danish bonds is the still the largest asset class but international assets is becoming increasingly important in the Danish life- and pension sector, see chart 1. In 2000, investment in foreign bonds accelerated sharply almost matching the continuing trend to invest in international equity.
The investment in foreign bonds cover a wide spectrum ranging from high quality European bonds as an alternative to Danish nominal bonds to so-called high yield bonds or emerging market bonds. The search for interest rate pick up goes on.
It is characteristic that investment in foreign equity continued on a high level in 2000 where only falling prices prevented the share of assets from rising even higher.
On top of that is, it fair to say that the interest in alternative investments is increasing; a rising number of companies take an interest in private equity very often in the shape of private equity funds, and also investments in hedge funds are being mentioned in several companies, which would have been unthinkable just a few years ago. But also low correlation with traditional investments is becoming a hot issue in the life and pension sector.
In combination with the inclusion of bonds at market values at the end of 2001, this of course put pressure on the reserves, and Danish companies is looking for new ways to be able to increase the risk of their portfolios as well as covering liabilities.
This in fact is an exiting new trend and in total the Danish market is rapidly changing these days in order to adjust to new conditions.
Jesper Kirstein is managing director
of consultants Kirstein Finans in