Nordic pension funds are subject to restrictions on the size of their allocations to alternatives. But many want more flexibility than they are allowed. Angele Spiteri Paris talks to Kjetil Houg of the Norwegian pension fund OPF about the fund's investment outlook
The Oslo Pensjonsforsikring (OPF) worked hard to keep it’s equity allocation high during the crisis and benefited from rallying equity markets last year. But, despite good performance, all the fund’s wishes have not yet been granted as regulation stops it from increasing its alternative allocation, which is something it would very much like to do.
Kjetil Houg, CIO of the Norwegian pension fund, says: “We are constantly reviewing our exposure to alternative assets but are currently restricted by a 7% cap that applies to all pension funds in Norway.”
The €5bn OPF has constantly been close to the maximum limit on alternatives.
The Norwegian ministry of finance is currently in the process of revising these restrictions, but neither Houg, nor anyone else is in a position to predict the outcome.
Until January 2008, Norwegian pension funds also had to deal with a 35% restriction on equity allocation and a 5% cap on alternatives. The Norwegian regulator then reviewed the restrictions on investments, removing the equity limit and increasing the alternatives allocation cap from 5% to 7%.
The OPF invested in four private equity funds in January 2008. “Private equity and hedge funds can be good long-term investments and improve the overall performance of our portfolio, but manager selection holds the key,” Houg said following the appointments.
Although the OPF is very close to the cap limit, Houg says: “We are always on the look out for good opportunities and if we find such opportunities we will seek to explore them.”
One of Houg’s peers, Paal August Nordhagen, CIO of the pension fund Akershus, has reportedly used a combination of exchange-traded funds (ETFs) and indexed bonds to work around the restrictions.
Asked about this, Houg says the OPF fund didn’t plan to be creative in the same way in order to achieve higher risk exposure.
However, Houg says he has found some opportunities worth investing in. The fund is due to make an allocation to two hedge fund managers while also taking money out of another hedge fund mandate. The fund typically allocates hedge fund mandates of around €20m.
But Houg says that in light of all that has happened, “we are more focused on bringing in good performance than making new investments”.
And indeed, this seems to have worked as the fund performed reasonably better than its peers.
The OPF, which covers Oslo’s local public authority employees, is run as a life insurance company. Houg says: “We have made a return of 9% in 2009, despite a very moderate equity allocation of below 15%.”
The fund kept its head above water during the crisis with astute changes to its portfolio and reaped the benefits as equity markets rallied in 2009.
Houg explains: “When we find ourselves coming under pressure, we have to adjust the overall risk position of the fund. We wanted to keep our equity holdings relatively high, as we didn’t want to sell at the bottom of the market.
“Starting in Q3 2008, we bought into options. We restructured our equity portfolios, switched out of illiquid instruments and moved into indexed equity funds. We weighted down the active portion of our portfolio and exploited our sovereign exposure during the latter part of 2008.”
He says that significant build-up in capital on behalf of the municipality of Oslo, the fund’s sponsor, in November 2008 also enabled the fund to take more risk in its portfolio.
As a result, the fund was one of the few that found a so-called ‘place to hide’ when several asset classes previously thought to be uncorrelated began performing in a very similar fashion.
Houg says: “I think it is a misinterpretation for people to say everything was correlated. Not everything was correlated, but rather illiquid assets were correlated to equities. But there were places to hide.
“For example, these illiquid assets had a negative correlation to sovereign bonds, especially Norwegian sovereign bonds. As a result, we managed to emerge with a relatively small loss during the turmoil… We also saw a good return from our allocation to convertible bonds.
“This [the change in the portfolio] all served to keep our equity allocation up and allow us to benefit from the significant improvements in 2009.”
In-house vs outsourced
At present, 50% of the pension fund portfolio is managed in-house while the other 50% is managed by third-party asset managers. Asked whether this ratio is bound to change any time soon, Houg says: “This balance is all right.” He explains that there are certain asset classes the pension fund will never consider managing in-house.
“The expertise we have in-house handles domestic equity, fixed income, money markets and real estate – although we outsource the administrative duties. We also manage derivatives.
“Asset classes where we think it’s better to buy in expertise include hedge funds. This is something we will probably never do internally because to be a good hedge fund manager you have to have excellent and specific expertise, so it is better to buy in that competence. The same goes for private equity,” says Houg.
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