THE QUESTIONS

1. Last year was a bad year for Danish returns – how will you improve that?

Henrik Franck, chief investment officer, PFA:

Most Danish pension funds lost on long-term interest rate instruments last year. I think you have to accept that we need to cover our liabilities – the best we can do is ensure that the assets track the liabilities as well as possible. In addition, we strive to diversify the portfolio, for example, by building a portfolio of alternatives, and enhancing returns by generating some alpha.

Niels Erik Petersen, chief investment officer, Architects’ fund and the agronomists and veterinarians’ fund:

Our returns were not that bad last year but we are of course always trying to improve. It is important to get the right risk exposure and the right mix of different asset classes for our two pension funds. We are also always looking at our managers to see whether they can improve or not, as well as thinking about whether we could improve by outsourcing other areas.

Jan Ostergaard, chief investment officer, Industriens Pension:

For us, returns were not that bad. But we have to be realistic – we are not expecting the returns we have seen in the past to continue. We are gradually diversifying our portfolio and turning our investments towards private equity, property and absolute return strategies, but it takes time.

Michael Nellemann Pedersen, chief investment officer, PKA:

I do not believe it was such a bad year. Both equities and property had great performances. We are in the process of diversifying and building up our alternatives portfolio. We will continue investing in infrastructure and have already made two new commitments this year. We are also looking to double our private equity investments in the next two years and will increase our foreign property investments.

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2. How are you coping with low bond returns?
Henrik Franck, PFA:

The problem is not that bond returns are low but that they are rising. As a consequence we have losses on the bond portfolio and, more importantly, on our liability coverage. Fortunately, we have been able to generate good returns from our equity portfolio as well as from alternatives. These gains have more or less compensated for the losses on the fixed income side.

Niels Erik Petersen, chief investment officer, Architects’ fund and the agronomists and veterinarians’ fund:

We are looking at whether we can get higher and/or more stable returns from other asset classes instead of bonds, and that could, for instance, be through hedge funds. We are looking at changing our asset allocation to incorporate more risk into our portfolio. Our low guarantees allow us to manage that risk.

Jan Ostergaard, Industriens Pension:

It has been difficult to get good market returns from bonds and we still do not expect very much market return from the asset class. We view our bond holdings as a buffer when deciding on allocation of risk. Part of the reason why we have been overweighting equities is due to the poor performance of bonds. But we are positive about emerging market debt.

Michael Nellemann Pedersen, PKA:

We reduced our exposure to bonds last year and have continued diversifying into alternatives as a response to low bond returns. We are also currently planning to expand our existing bond portfolio and are investigating whether to include other types of debt, such as emerging market bonds and US state bonds.

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3. Danish funds seem slow to take up hedge funds - what is the problem with hedge funds?

Henrik Franck, PFA:

One problem is that they have a very short history, and that history has been relatively good in terms of returns but has come alongside a lot of scandals. Every now and then something pops up in the media to hurt the hedge fund industry and that tends to overshadow the asset class’ performance.

Niels Erik Petersen, Architects’ fund and the agronomists and veterinarians’ fund:

Most hedge funds are not that transparent and that makes it difficult to calculate risk. When liquidity goes out of the market, you may get hit by risk you were not aware of and this is particularly true of hedge funds. It is very important for us to know that hedge funds fulfil all our requirements and comply with all laws.

Jan Ostergaard, Industriens Pension:

There are definitely challenges with investing in hedge funds and we do not yet know that much about the market. Hedge funds have had a bad reputation. There is still a big difference between the best and the worst funds, and one has to be careful before entering the market. But we are currently deciding on an absolute return strategy that will probably include investments in hedge funds.

Michael Nellemann Pedersen, PKA:

The main problem is the lack of transparency. It is difficult to see what they do and how they can create value. We are trying to understand the nature of hedge funds, but infrastructure and private equity investments have so far taken up all of our resources.

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4. Are you doing enough when it comes to SRI?
Henrik Franck, PFA:

Yes, but we do it because it makes sense as an investor. Profit and SRI go hand in hand. I seriously believe that you cannot make long term profits from investments in companies that do not follow SRI guidelines. Public sentiment or legislation will eventually turn against that company.

Niels Erik Petersen, Architects’ fund and the agronomists and veterinarians’ fund:

Our board decided on some SRI guidelines earlier this year, which we are in the process of implementing. It is now higher on our agenda than it previously was. In our opinion, to get a high long-term return you need to act decently.

Jan Ostergaard, Industriens Pension:

Yes, I believe we are doing enough, but we are probably not the most active Danish fund in that arena. We have ethical policies and have employed a screening bureau to provide us with ethical advice. We try to be 100 per cent transparent about all our investments. There is, however, not much pressure coming from our members on the issue of SRI.

Michael Nellemann Pedersen, PKA:

Yes, we have a good policy for SRI. We believe there are long-term benefits from SRI and that economic criteria and ethical criteria go together. If a company abuses ethical principles and is not willing to change, our shares in that company will be sold. But we also use positive criteria and try to support the ones who are doing well.

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5. Are you happy with your foreign asset managers? How could they improve?

Henrik Franck, PFA:

We hardly use any foreign asset managers and most of our portfolio is internally managed. I do not believe foreign managers can offer something that Danish managers cannot – there are Danish managers of just as high quality. And, of course, it does not hurt to be Danish, since it obviously makes communication a lot easier. If we are not happy with a manager, we will replace it.

Niels Erik Petersen, Architects’ fund and the agronomists and veterinarians’ fund:

Yes, we are happy with our foreign managers. But it is our responsibility to make sure there is enough diversification among our asset managers and mandates and that we have the right combination. If we are not happy with them, we will take action. What interests us when it comes to our managers are the returns, not whether they are foreign or Danish. Operational risk is also something we try to look at and reduce.


Jan Ostergaard, Industriens Pension:

Yes, we are happy with our foreign managers. Our foreign managers’ performance has contributed to us outperforming our benchmark. We have always used foreign external managers and we do not see any problems with hiring foreign firms. When we screen the market we find both well-known houses and names we have never heard of before but we do not turn anyone away just because we are not familiar with them.


Michael Nellemann Pedersen, PKA:

Yes, we are happy with them, otherwise we would not keep them. They could always improve but it is our task to make sure that they are continuously improving and performing well. Monitoring our managers is an ongoing process, both when it comes to performance and our exposure.

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FUND BREAKDOWN


PFA
Total assets: €28.7bn

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AP-PDJ
Total assets: €1.6bn

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Industriens Pension
Total assets: €5.9bn

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PKA
Total assets: €15.6bn