Oil prices have shown no sign of letting up, and many pension funds are tagging along for the ride. They see commodities, and especially oil, as a nice way to make sure their fund beats inflation and produces acceptable returns.

However, recently, OPEC countries – and Saudi Arabia in particular – have made noises about increasing output to cut prices. They are rightly concerned that higher prices are pushing people towards alternative sources of energy. While no joint decision has yet to be made by the cartel, it is highly likely that, regardless

of the decision, Saudi Arabia will

push ahead unilaterally. Seeing as the country has nearly one-sixth of the world’s known oil reserves, this could have an important impact.

In general, most pension funds will state that they are long-term investors, and are therefore not concerned with short-term changes to the oil price. However, they will also point out that it is foolish to invest too much into any one commodity.

One such fund is the DKr440bn (€58.8bn) Danish ATP pension scheme. The fund has a relatively large oil allocation with 5 per cent of its assets invested in the commodity. Its chief investment officer for beta, Henrik Gade Jepsen, acknowledged that this could be seen as risky.

He said: “Of course you could lose, but we would not invest more than what we could afford. I think it’s riskier to have a very concentrated portfolio with 60 per cent allocated to equities. We have a balanced portfolio and are probably more diversified than other funds, so our other investments would mitigate any loss.”

Another interesting case is that of the DKr93.2bn Danish Sampension. This fund had intended to invest in commodities this year, particularly oil, but backed out after prices hit unprecedented levels. Now it has decided to instead look into energy-linked equities as a way to gain exposure.

Henrik Olejasz Larsen, chief investment officer for the fund, said that, despite the recent news, it would not adjust its strategy, believing that the long-term prospects for oil remained positive.

He said: “We’re not at the point where we’d consider adjusting our strategy. We will continue to build up a portfolio so that in a longer-term period we are not exposed to short-term movements.”

When questioned on the possibility

that alternative energy could hamper

the value of oil as a long-term investment, Mr Olejasz Larsen stated his belief that

an increase in alternative energy technology would not moderate the price of

oil and that, if anything, it would only act as a counterpart.

Finnish €28.7bn pension company

Varma, on the other hand, has been trying to restrict the role of energy. In its

index-linked investment, the energy

investments are no more than a third of

its assets.

“Some indices are dominated by energy and that’s not what we were looking for. We wanted a broader commodity exposure. The energy sector has performed excellently, but we made a specific decision to have a more diversified basket of commodities that isn’t dominated by one single sector. We also feel that we have no real insight into what will happen to the oil prices in the future,” said its chief investment officer, Risto Murto.

For now, however, an agreement by OPEC has proved elusive. Oil prices have continued their charge and Saudi Arabia has pledged only a modest increase in production, which should have little short-term impact. The oil world has changed, and despite the country’s vast resources, it cannot manipulate the market as it could in the past. New reserves in Russia and Norway, along with the potential of untapped sources in Alaska, have dented its market share. That said, despite a market with this many outside factors, pension funds do appear to be watching this situation very closely.

OUR VIEW

Oil might hit $200 (€128) a barrel within 12 months, but that doesn’t mean it is a viable long-term investment for a pension fund. When petrol prices become untenable for the millions of people who need to drive cars every day, they will flock to a cheaper mode of transportation.

For pension funds it’s a tricky act. Oil is going nowhere but up, and is offering schemes a chance to both make some money and outpace inflation. Over the short term, it is probably a good idea, but pension funds are not short-term investors. They should be asking themselves two questions. The first is what the oil price will be in 30 to 40 years’ time. This is crucial as their members will be involved in these schemes for around the same period and we might not even be using oil anymore, in which case it’s value will be next to nothing.

The second question is related to the length of the investment. With oil’s potentially limited future, the best bet is surely a short-term one as some analysts see the black stuff hitting $200 a barrel in less than two years.

In our view, the way to play this situation is simple. Go for oil, but once funds have made a decent profit, get out. A better long-term strategy would be to give serious consideration to the types of alternative energies that will become mainstream once oil either runs out or becomes unpalatably expensive.

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