The Danish pension fund for the financial sector is looking at changing its alternative investments. Angele Spiteri Paris reports ...

Despite tumultuous financial markets and ever-mounting regulation, the Danish pension fund for the finance sector, Finanssektorens Pensionskasse (FSP), is sticking to its investment strategy.

Like most investors, in the first half of the year FSP was let down by its equity investments. Fund performance was further exacerbated by an unsupportive bond market, with rising interest rates and high inflation.

For the first half of 2008, FSP posted a negative return of -3.8% before tax, most of which was a result of the equity portion of the portfolio. “Equities form quite a large portion of our assets and therefore when markets are returning between -15% and -20%, we had to see the impact of that on our portfolio,” says Søren Schjødt-Hansen, chief investment officer at FSP.

“Negative returns over a short period of six months are expected to a certain extent when you aim to stick to your long-term strategy,” says Schjødt-Hansen.

And the fund will stick to its guns with regards investment, having already entered into hedge funds and private equity. Schjødt-Hansen says that by and large the pension fund does not make many tactical plays, preferring a more stable and strategic approach to the inexact science of market timing.

Every year, FSP carries out an asset-liability modelling (ALM) study to determine the strategic asset allocation. However, according to Schjødt-Hansen, the results of the study have differed little over the past two years and he forecasts that 2009 targets will most likely not break the mold.

“Although we had a negative return this year, we’re still well capitalised, so I think this year’s ALM won’t look too different. Overall, we are well diversified, but you might see changes in the diversification patterns of the fund.”

More alternatives
So at least some changes can be expected. The changes in diversification patterns that Schjødt-Hansen talks of mean a possible move into different alternative asset classes.

“We have an ongoing process to optimise alternative assets both on a regional basis and within the different segments in the asset class. The current allocation to private equity and real estate is 20%”.

However, though the fund is open to forays into new investments, Schjødt-Hansen said FSP’s hedge fund allocation is not likely to increase. “We’ve been in hedge funds longer than some other institutions,” he says. “The concern is that you don’t always get what you expect and specific correlations the asset class has might break down in volatile times. Therefore it can be a difficult area into which to dig further.”

Schjødt-Hansen did say, however, that the fund is looking closely at emerging market bond exposure.

Manager searches
In the first half of 2007, the fund decided to outsource its administration to Nykredit Portefølje Administration. Consolidating their administration is something that several pension funds have done and Schjødt-Hansen says it has proved beneficial for FSP, particularly in the field of investments.

“In addition to the increase in efficiency and cost cutting, an external administrator frees up time for us to concentrate on our investments,” he says.

But the benefits go beyond this. Joint manager searches are becoming a common sight in Denmark, as mid-sized pension funds get together to make the most of their pooled assets and expertise. The number of funds included in each group never goes beyond five.

“If the group is too big, it is difficult to coordinate,” explains Schjødt-Hansen.

FSP has cooperated with other funds in searches for plain vanilla bond and equity mandates and also commodities. Also, in 2004, FSP was part of the Danish Real Estate Club with other pension funds, namely KP, PKA, Pen-Sam Liv and PFA Invest International.

“We wanted to broaden our investments internationally,” says Schjødt-Hansen.

It is the consolidation of administration functions that has facilitated such measures. The joint investment administrator can provide easy access to certain funds. “We have carried out joint selections of mandates and then put the chosen fund into a vehicle set up by the administrator,” Schjødt-Hansen says. “This way all the pension funds involved can invest in that particular fund, if they so chose.”

Up until a year and a half ago, FSP managed its Danish and European bond mandates internally, but the fund then had to take the decision to either build up a strong internal asset management team or focus on honing its manager selection skills.

“We decided to outsource our asset management and I don’t think we will ever consider internalising any of the mandates,” Schjødt-Hansen says. “We just have some internal overlay capabilities – interest rates and equity allocation – and we can chose the investments’ bias, be it growth or value.”

Regulation
Regulation is a bind on pension funds everywhere, and Denmark is no exception. The regulatory burden that funds are constantly dealing with may mean that pension schemes like FSP couldn’t internalise asset management without further draining their limited resources.

“There is a lot of work to do with [regards to] regulation. It puts pressure on our resources,” says Schjødt-Hansen. He adds that the amount of regulation in Denmark has grown and this factor formed part of the reason to outsource the fund administration in the first place. “We automatically have many more things to do, and to some extent regulation is forcing us to do these jobs,” he adds.

“In 2012, Solvency II will come into force. Until now we have had the Danish version of Solvency II which requires us to document around 90 different points in accordance with solvency ratios,” says Schjødt-Hansen. Although fulfilling the requirements has been a challenge, the experience should set Danish pension funds in good stead once Solvency II is implemented.
“It is a learning process and I think we will be better equipped in that respect,” Schjødt-Hansen concludes.

©  2008 Funds Europe