Gaining an increased exposure to alternatives is a trend for Nordic pension funds and for Oslo Pensjonsforsikring (OPF), the €4.5bn pension fund for Oslo’s local public authority employees, it is no different. Currently in the process of increasing its allocation to private equity and hedge funds, OPF has just made a significant allocation to property. “Private equity and hedge funds are good long-term investments in an attractive asset class with competent managers and we are expecting good returns,” says Kjetil Houg, OPF’s finance director.

The fund has already put money into three private equity funds this year and is in the process of adding one additional fund to its portfolio. It is taking advantage of new investment regulations, which came to force in the beginning of 2008 and cut the limits on equities and bonds as well as opening up a larger allocation to alternatives.

Holding strong

OPF’s property holdings went up from 3.3 per cent to 12.7 per cent last month when it made a €440m direct property investment. It predominantly holds direct property investments in Norway, but also has a 1 per cent allocation to funds.

“We’ve wanted to increase our allocation to real estate for some time and spent the last year looking for good opportunities. We have frameworks to increase further, possibly in Europe, and might do so, but the market looks weaker going forward and capital requirements have risen,” says Mr Houg.

Four per cent of the fund’s assets are also allocated to infrastructure, but the new regulations have forced the fund to cut its expansion plans.

“We had hoped that the new regulations would allow a 20 per cent exposure to alternative assets and are disappointed that the limit was set at 7 per cent. OPF has previously had good returns from these assets and we think alternatives are attractive for long-term investments. We’ve had, in particular, good experience with infrastructure investments and were in the process of adding more but have been forced to shelve our plans,” says Mr Houg.

He adds that infrastructure has very interesting risk-adjusted and stable returns, with little macro-economic risk. It is an asset class the fund has been investing in for years.

Portfolio augmentation

OPF has also halted plans to include commodities within its portfolio. “We were interested in taking on commodities, but the new regulations have put an end to that. We think it’s an interesting asset class, but very demanding at the same time since previous performance is unlikely to give an indication of future returns,” says Mr Houg.

However, contrary to its current strategy of boosting alternatives, OPF decided last year to reduce its hedge fund allocation from 5.5 per cent to 3.3 per cent. Five of its hedge funds, which focused on credit strategies, quant-based strategies and macro-strategies, were sold.

“We did it for several reasons – mainly to do with risk, returns and the overall composition of our portfolio,” says Mr Houg.

The fund is also considering adding more equities to its portfolio, which currently makes up 26.1 per cent of its allocation.

“We are of course concerned about the turbulence in the equity market, but also regard it as a good opportunity to increase our equity exposure. It shows, above all, how important it is for a pension fund to be able to diversify its assets and spread its investments over several uncorrelated asset classes.”

Meanwhile, OPF is planning tweaks to its existing equity portfolio and will allocate more to international stocks and less to the domestic market. Mr Houg says the fund has a too large a proportion invested in the Norwegian market and needs better diversification over time.

In 2006, the fund built up a Swedish equity portfolio. About 3.5 per cent of its assets are allocated to Swedish stocks.

“It complements our Norwegian portfolio and gives us exposure to several leading companies within sectors that are not well represented on the Norwegian stock exchange. We are very pleased with this portfolio, even though the Swedish market has now experienced a significant correction,” says Mr Houg.

OPF has a limited exposure to emerging markets, but does have two equity funds that both invest in different Asian stock markets.

Upping the exposure to equities and alternatives has been done at the expense of bonds, which it is continuing to reduce. In 2006, bonds were reduced by 10 per cent.

“Our previously large exposure to bonds was because of regulatory requirements but we will continue to reduce that. Within our bond portfolio, we don’t wish to take a lot of credit risk and are therefore looking at index-linked bonds. We are also evaluating further allocations to different alpha products,” says Mr Houg.

Positive outlook

OPF posted value-adjusted returns of 5.2 per cent for the first three quarters of 2007.

“We have beaten all reference indices for our internally managed portfolios. All asset classes, excluding index-linked bonds, have had positive returns and alternatives, in particular, posted great numbers. The fourth quarter was very good for OPF.”

The fund is following the ethical guidelines of the Norwegian Government Pension Fund – Global, the €260bn giant run by the ministry of finance. It, therefore, does not invest in companies excluded by the ministry of finance’s ethical council.

“As a pension fund representing a public employer, it is very important that there are no doubts about our integrity and ethical standpoint. We wish to come across as a responsible owner in the companies we invest in, which we also think is profitable in the long run,” concludes Mr Houg.

Location: Oslo, Norway
Members: 110,000
Assets: €4.5bn

2007 (first three quarters) 5.2%
2006 7.9%

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