“We are very pleased with the performance. It is the best performance in the fund’s history and exceeds our expectations,” he says.

Moving to the hard numbers, Gildi – formed in June 2005 from a merger of the Framsyn and Sjomanna funds and ranked third by assets under management (AUM) – pulled in returns of 9.6 per cent (bonds), 16.3 per cent (foreign equities), and a stellar 71 per cent (domestic equities) over three asset classes.

Ahead of the other major Icelandic pension funds reporting – three of the country’s top-five pension funds have yet to finalise their results as nrpn went to press – do Gildi’s results represent an early trend or merely the fortuitous results of a sample of one?

The Lifeyrissjodur Almenni pension fund – currently ranked fifth by AUM – provides a tantalising barometer. And as figure one shows, barometers rarely come better, with its three Life Portfolios I–III, plus a defined-benefit plan, illustrating a range of bond–equity weightings.

So with four clear investment strategies under a single fund umbrella, and assuming that pension fund investment managers are created equally, the Almenni’s four strategies – at least in theory – should hint at likely achievable returns with similar weightings.

Of course, the sharp-eyed will have noticed that Almenni’s 70:30 equity allocation breaches the 50 per cent regulatory cap imposed by the FME, Iceland’s financial regulator, on equity investment. “We use structured bonds to increase our exposure to [overseas] equities,” explains Gunnar Baldvinsson at the fund. Average returns on overseas equities last year hit 16.75 per cent.

“I think it is necessary for us to invest in foreign equities in order to diversify,” he continues. Iceland’s relatively limited domestic equity market potentially leaves a fund exposed to the vagaries of a single market. Moreover, tempting though the current high rates of domestic equity return might be, diversification abroad means that investment managers in Mr Baldvinsson’s position increase their exposure to a wider range of investment and performance opportunities.

This doesn’t suggest that the bottom has fallen out of domestic equities. “The year has started well. Today the Icelandic stock exchange is already up 15 per cent [on the year], and most analysts expect it to continue to rise this year by 20 to 30 per cent,” says Mr Baldvinsson.

Taking in the broader picture of 2005, the ICEX-15 gained 65 per cent over the year – the third year in a row in which the Rekjavik index posted increases exceeding 56 per cent.

Unsurprisingly, given such stellar returns, Mr Baldvinsson said that he has no plans to exit Icelandic equities in any hurry. But Gildi’s Mr Tryggvason says: “We think the domestic equity market will do well this year, although it will be more challenging. Some stocks will perform very well this year.” And do well they might, given the trend for Icelandic companies themselves to diversify abroad.

Mr Tryggvason and Mr Baldvinsson both expect further increases in the Sedlabanki (Central Bank) policy rate – the Almenni fund head puts his money on increases in the order of 50–75bp.

In spite of recent gloomy predictions for the domestic bond market, the Almenni’s bond-weighted Life Portfolio III beat its benchmark by 0.6 per cent. And the reason for the out-performance? “We shortened duration [on bonds] last year when interest rates were going up,” says Mr Baldvinsson.

“Overall, the domestic economy is doing very well, with GDP over 5 per cent,” added Mr Tryggvason. Echoing the OECD’s recent concerns, he adds that the economy is still “showing some signs of overheating”, although overall he expects to see a more balanced economy in 2006 and beyond – but he also expects “inflation of about 4.5 per cent”.

Invited to speculate on forthcoming fund results, Mr Baldvinsson said that investment strategies slanted towards equities – and overweight in Icelandic equities – are most likely to post impressive results. Conversely, he marks down bond-heavy funds and those with higher weightings in foreign over domestic equities.

Weighting – with active management – is how Arnaldur Loftsson’s, fund manager of the Frjalsi (Independent) pension fund, sums up his 2005 strategy. “Frjálsi’s investment strategies generally gave far better returns than their benchmarks, showing yet again that active fund management has proved superior to a passive one,” he says.

“The strong results can be particularly attributed to underweighting and overweighting in individual classes of security, the selection of individual securities and effective FX management.”

The Laekna (doctors) fund – merged in November 2005 with Almenni – “did very well last year as well,” adds Almenni’s Mr Baldvinsson, posting a 16.7 per cent return and outperforming its four new Almenni stablemates.

So what do the early numbers suggest? It is likely that the pension fund success story for 2005 will be overweight in equities – favouring the domestic variety, says Gunnar Baldvinsson, with returns from more conservative bond-heavy funds probably feeling the pinch.
SB

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