It is not often when you ask the market to predict a particular trend for the following 12 months that you actually get something concrete. Wishy-washy more typically describes the responses received.

But not this time. When asked what the investment of choice for pension and insurance funds in 2008 would be, the Nordic market was resolute: emerging market equities.

“You want a hot topic for 2008?” asks Mats Langensjö, head of Nordic region at Pioneer Investments, who was last year poached from Aon Consulting. “Easy – emerging markets. I see emerging market stocks making up 10 per cent to 15 per cent of an investor’s equity exposure. Any increase will be at the expense of US stocks.”

Richard Tyszkiewicz, director of business development at Bfinance, which has previously carried out manager searches for AP 7, agrees: “Emerging markets will be a big draw for pension and insurance funds. We have been asked to do a number of emerging market equity searches but demand from Norway, Sweden and Denmark is definitely ahead of that from Finland.”

Maybe so, but Valtion Eläkerahasto (VER), the €12bn pension fund for Finnish state employees, is to double its exposure to emerging market stocks from 5 per cent to 10 per cent throughout the course of this year.

Timo Löyttyniemi, managing director at VER, felt the fund’s portfolio was too reliant on Europe: “Our portfolio has been a bit too tilted towards Europe with an equity allocation of about 70 per cent. In a bid to reduce that, we decided to put more emphasis on emerging economies. It’s a region where we’ve always been an active investor.”

Gunnar Balsvik, chief executive officer (CEO) of Kåpan Pensioner, the E3.7bn pension fund for Swedish government employees, also sees opportunities. The fund has 10 per cent of its equity holdings in the sector. “I believe emerging markets have great potential – they are one of the most interesting areas to invest in because that is where the growth is. Africa, in particular, is very exciting.”

In fact, it is difficult to find anyone who is pessimistic about the region. Indeed, the results of nrpn’s latest quarterly investment survey (see pages 14-15), which polled 14 pension and insurance funds with more than €81bn of assets under management, found that more than 70 per cent of respondents expect emerging markets to be an investment trend this year with almost 30 per cent intending to push more of their money into the asset class.

“We have noticed a shift in attention from more traditional products such as global, European and US equities to more niche and specialised sector strategies,” says Michel Ho, head of Nordic business development at Allianz Global Investors Europe. “The fact emerging markets represent just a fraction of global market capitalisation provides a great opportunity for pension schemes to diversify their portfolios. An increased allocation to emerging economies has a much bigger impact on the total portfolio than, for instance, an increase in US or European stocks.”

The big picture

From a macro-economic point of view, he adds, “it makes perfect sense to raise your allocation to markets that seem to be decoupling themselves from some of the major economies”.

In Norway, tweaks to the investment regulations have been particularly helpful. Despite the new rules, which came into force at the beginning of 2008, being more restrictive than many industry figures would have liked, the limits on alternatives – of which emerging market equities are included – rose from 5 per cent to 7 per cent.

Ole Morten Geving, state secretary at the Norwegian ministry of finance, said of the government’s decision to only raise limits to 7 per cent: "We came to the decision after much consideration. Some of the investment classes included in alternatives have great risks attached, but our move still saw a significant increase of some 40 per cent." The main concern, he continued "was the solidity of the pension companies and the security of the pension savers' capital".

But that has not stopped Norwegian investors getting involved. Øystein Stephansen, chief financial officer at Vital, the €27.5bn Norwegian life and pension insurance company, is one such example: “Although we haven’t got any aggressive plans to increase our allocations we will definitely invest more in private equity, hedge funds and emerging markets.”

The ethos is the same in Denmark. Sampension, for example, the DKr93.5bn (€12.5bn) pension company, has been overweighting emerging market equities for some time. The fund, which has just announced plans to invest in commodities and infrastructure, has one-tenth of its entire equity holdings invested in emerging economies.

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