While many funds are confidently riding out the storm, PensionDanmark, the DKr70.4bn (€9.4bn) Danish pension fund, is actively taking advantage of opportunities created by the market crisis. It has changed its investment strategy and is making some significant shifts in its asset allocation.

“We have an obligation to explore and give answers to the new financial environment. Our main reaction has been to allocate a large chunk to the credit market and we are trying to take advantage of the dramatic increase in risk premiums,” says Torben Möger Pedersen, chief executive officer of the fund.

Its credit exposure is about 6 per cent and includes high-yield and emerging market debt, some loans and some mezzanine lending and asset-backed lending exposure. It plans to more than double that at the expense of fixed income.

“These types of assets, including some new loan products will account for 15 per cent of assets at the end of the year,” says Mr Möger Pedersen, who expects returns of around 10 per cent from credit products.

The fund’s other main reaction to the market crisis has been its decision to unwind its dollar hedge. Since 2001, it has hedged its currency 100 per cent against the dollar and the euro, but is now in the process of relaxing the dollar portion.

“Hedging has been a nice thing for us, but we are now unwinding our dollar hedge to protect our returns. The dollar is very cheap at the moment, but we believe it will regain some of its losses,” he says.

The fund will also increase other alternative asset classes, such as infrastructure and property. However, Mr Möger Pedersen believes there will still be a correction in the asset prices for some alternatives and is pessimistic about real estate and private equity in the short term.

“I think private equity funds will have a hard time, especially those relying heavily on leveraged financing and high debt because of the high risk premiums on the credit market. Real estate also needs to adjust to increased risk premiums,” he says.

The fund has been underweighting its equity exposure for some time, but says it would be premature to go back to the normal position at the moment. Its new target allocation also includes a 4 per cent increase in equities to 36 per cent.

Despite only pulling in returns of 2.6 per cent last year, Mr Möger Pedersen still believes the result was “very satisfactory” and says it was among the top five results in the Danish industry. The first quarter of 2008 was, however, even worse and the fund had returns of -3.9 per cent. According to Mr Möger Pedersen, it was down to a rather high allocation to equities and credit products, which he believes has regained some momentum since March. He is, however, still cautious about the current market conditions.

“I don’t think the crisis is fully over. Maybe the credit crisis, but our concern mainly regards macro-economic issues, such as how big the US recession will be and its impact on Europe and Japan. At the moment, we’re quite cautious and have not yet increased our equity exposure,” says Mr Möger Pedersen

The fund, which is the scheme for people working in building and construction, transportation and private sector services, is also looking for ways to become more cost-efficient. It has already outsourced its member administration to the Danish giant ATP, but is now also looking for other ways to keep costs down. Administrative costs have increasingly become an issue in Denmark. Mr Möger Pedersen believes that the large economies of scale in the pensions industry make the idea of outsourcing very cost-effective, but he is also looking into more innovative strategies.

“We are using outsourcing as one way of reducing costs, but our cost strategy is also focused on utilising the rather advanced digital infrastructure in Denmark. We have a vision to become the first form-free pension fund in Denmark, or even in Europe, and are aiming for all our pension payments to be triggered by either a phone call from the member or based on data from public data sources regarding death, disability and critical illness,” says Mr Möger Pedersen.

The fund also plans to outsource its corporate governance activities to a third party and is expecting to have the structure in place by the end of this year.

“We are having conversations with a few providers in order to expand our own knowledge of the area,” says Mr Möger Pedersen, who thinks the number of providers is sufficient to make it a competitive environment

The fund’s listed equity portfolio includes about 1,000 companies, but it only has a small stake in each company. The main reason it is opting to outsource is to keep costs down.

“Outsourcing the corporate governance activities will not only be cost-effective, but also effective from an engagement point of view, since our partner will pool together voting power from other institutions. That makes success more likely,” said Mr Möger Pedersen.

The fund intends to sign up to the UN Principles for Responsible Investment at the end of this year, but put the move on hold until its corporate governance structure is in place.

“We find it more suitable that we should wait to sign up to the principles until we are able to fulfil our obligations. These technical issues should be resolved before we join,” says Mr Möger Pedersen. The fund will also need to deal with issues regarding its custody structure before appointing a corporate governance provider.

Location: Copenhagen, Denmark Assets: €9.4bn Members: 550,000

Printer friendly version

Email this article to a friend