After years of stable growth and one of the best returns of any Danish pension fund in 2006, the €6bn Industriens Pension is now ready for change. Returns of 7.7 per cent, rising contributions and falling liabilities have given the industrial labour market fund a new found confidence and in the first quarter of this year a number of alterations have been made to its asset allocation – the most important being its move into alternatives.

“The company is very well consolidated and our guarantees are not restricting us very much. This has given us a new found freedom of investment and allowed us to look into some new asset classes,” says Jan Østergaard, the fund’s chief investment officer for the last nine years.

And the process has already been started. It recently invested in a Central and Eastern European property fund as well as a global venture fund and is about to increase its exposure to both property and private equity.

Cutting back on equities

“This year we are planning to invest in two to three European property funds and hope to have 5 per cent of our total assets invested in property over the next five years as well as incorporating investments in the US,” says Mr Østergaard.

“We are continuously increasing our exposure to private equity and have made a commitment to allocate 10 per cent of our assets to the sector,” he adds.

Until recently, the fund had only 0.2 per cent invested in a Danish property vehicle and 3.9 per cent invested in private equity.

“The reason for our low property allocation is that we have been concentrating our efforts on private equity. We were also initially a bit worried about the real estate market, both in Denmark and abroad, and whether or not the timing was right,” says Mr Østergaard. “From the beginning, we thought we would be investing more in Danish property than what we are now planning. We believe the Central and Eastern European markets are very exciting.”

In 2006, the portfolio was 56.9 per cent invested in bonds, 37.3 per cent in equities, 3.9 per cent in private equity, 0.2 per cent in property and 1.7 per cent in cash. Alternatives are, however, not the only investments undergoing change.

“We recently also decided to cut back on equities. We found that the general risk level had increased compared with the last couple of years and that there were too many risk indicators present: the slowdown of the US economy, rising property prices, the private equity boom and increasing oil prices. Given all those indicators, it didn’t seem right to overweight. Our neutral position is 30 per cent, which we have now moved back to. The main change is that we have decreased our foreign equity exposure from 27 to 20 per cent,” says Mr Østergaard.

Since the fund started its investment activities in January 1993, it has grown to become one of Denmark’s six largest funds. It has also seen its contributions increase since it was established - from 0.9 per cent of its members’ average wage to 12 per cent by 2010. Current contributions are set at 10.8 per cent, providing an annual inflow of around €1.8bn.

“When we began, we had to concentrate on a few asset classes and even then the management of those assets was outsourced. Since then we have diversified our portfolio and built up a strong team. The reason why I joined in 1998 was to do that. At that time, the fund only had ?800m in assets and one large balanced mandate and two smaller specialised mandates. We had to establish an investment department, finding out what people to hire and which systems to use for information, risk management and portfolio management, and that was very exciting,” says Mr Østergaard.

In the nine years that have elapsed since Mr Østergaard took charge of the scheme’s investments, it has grown significantly and now employs 13 investment professionals. Only nominal bonds, index-linked bonds and the bulk of the fund’s domestic equities are managed in-house.

Industriens Pension believes it has also got a well defined philosophy and strategy for its investments and use of managers.

“We believe in active management and think that it pays off,” says Mr Østergaard. “It has always been our philosophy. Looking back over the 14 years, we can see that it has added a lot of value.

“Three years ago, we decided we would change the way we were using managers.

“We split the market into five regions – US, Europe, Japan, emerging markets and Asia-Pacific. In each region, we decide on which type of mandates to use, decide on a philosophy, a strategy and how much risk to take – all of which is dependant on the nature of the market. We also spend a lot of time finding the right combination of mandates and try to consider how well a mandate fits with our existing ones,” Mr Østergaard adds.

Taking on foreign help

When the fund starts searching for a new mandate it does a comprehensive screening of the market, he continues. “There will be both well-known houses and names we never heard before but we don’t turn away anyone just because we are not familiar with them. We are used to using international managers and we don’t see any problems with hiring foreign firms.”

The fund currently uses 15 investment houses for its external mandates, all of which are large global firms except for local player BankInvest, which it uses for some of its Danish equities.

“In a couple of situations, we have been very close to using some small boutique houses, but we decided not to because we were worried about the administrative side. We found that the back office functions did not correspond to the standards we look for. It is very important that the custodian side of things works,” says Mr Østergaard.

Industriens Pension was established by the federation of Danish industries and a number of labour market unions in 1992. It covers the entire industrial collective agreement sector and is a compulsory defined contribution scheme, which means the fund does not compete for members.

It has 337,000 members, 60 per cent of whom actively pay into the fund. The rest are predominantly dormant members, primarily because they moved to firms not covered by the collective agreement. It is a young fund with an average age of 42. Men are in the majority. It only has a few pensioners.

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