In nrpn‘s last survey, attitudes on the investment climate were decidedly negative, but three months on it appears expectations have worsened. Nordic pension fund managers look set to react to the credit crunch by making some interesting moves into alternatives. Of all the funds involved in the survey, 66 per cent said they were negative on world growth prospects for the upcoming six months. Interestingly, only 8 per cent said they were positive, a significant drop from the winter and autumn, where 33 per cent and 53 per cent of pension funds said they were optimistic.

They are reacting by shunning traditional advice. More than half intend to cut their exposure to bonds, while 50.6 per cent are raising their equity holdings. Perhaps this has something to do with the fact that the vast majority of Nordic funds believe both the European Central Bank and the US Federal Reserve will cut interest rates twice over the next six months.

However, what is strange about this move into equities is the fact that most funds believe returns on equities will be fairly weak over the next six months. More than 40 per cent of funds believe US equities will fall by between 0.1 per cent and 5 per cent over the next half year, while two-thirds feel domestic market and Eurozone equities will only appreciate by about 0 per cent to 5 per cent. The area where funds are most optimistic is emerging markets, where 33 per cent forecast gains of between 5.1 per cent and 10 per cent.

Jeff Chowdhry, head of emerging equities at F&C Investments, believes that emerging markets are now a bigger contributor to world economic growth than the US in terms of percentage share.

He says: “Our estimates tell us that two-thirds of this year’s global growth will be directly attributable to emerging markets, which means the investment story in the region is still very compelling. Year-to-date emerging markets have fully participated in the downturn suffered by developed markets but that in itself shows a higher degree of maturity.

“In the past, when developed markets did really badly, emerging markets did much, much worse. Current losses are much more in line with what is happening elsewhere and I am confident that when risk aversion settles down, emerging markets are likely to outperform.”

Another interesting element is that funds appear more interested in making allocations towards asset classes that are sometimes regarded as riskier and less liquid. More than half of funds say they envisaged increasing their exposure to both hedge funds and private equity, while another 33 per cent said the same for infrastructure.

But at the same time, there are some traditionally defensive tendencies in the works as well. A quarter of Nordic pension funds said they would increase their cash exposure and another 16.7 per cent expressed interest in real estate. None said they intended to cut back on commodities.

The commodity story will continue to be a difficult asset class to play. While prices have continued to go upwards, there are concerns that the party could be over, to the effect that prices will fluctuate over the next few months.

Half of the funds believe that by October, oil prices will be somewhere around $95 (€60) to $104, near the level where they currently stand. A quarter predict that oil will be more than $105, but another quarter believe prices will actually fall to between $85 and $94.

New Star Asset Management’s head of global property, Stuart Webster, believes that problems in the property markets have been overhyped by the media, and that despite recent falls, the fundamentals still look good.

He says: “Traditionally, volatile stock and bond markets have led investors to move into high quality, tangible assets. For many this meant property, but has this relatively safe haven now been breached? The UK commercial property market has taken some of the early hits, but the question is whether they are fully justified and if they provide an indication of future movements of other established European property markets.

“International investors view the correction as a chance to buy into a fundamentally sound market at bargain prices. Prime properties in established continental European markets provide similarly attractive opportunities. France, Germany and Italy stand out although the full extent of the slowdown may be yet to come, with price movements in these markets lagging those in the UK. It is imperative to be in prime locations. Secondary markets in central Europe are likely to feel the credit drought most acutely.

“Established Asian markets should be a mainstay of a balanced property portfolio post the credit boom. While the risks are higher than in Europe, the rewards are commensurate. The decoupling argument is overshadowed by globalisation trends and a sustained US slowdown would affect the region, again making quality paramount.”

nrpn’s survey included 12 funds with total assets of €107.31bn.

ESG investment

Environmental, social and governance (ESG) investment criteria have found a big market in the Nordic region. Some funds have adopted firm investment rules that are largely based on ethics and the sustainability of the business.

Equities are the predominant asset class where Nordic institutional investors employ ESG tactics. An impressive 75 per cent of funds said they applied ESG criteria for their equity investments, compared to only 16.7 per cent for commodities.

Other asset classes with high ESG guidelines were bonds at 41.7 per cent, and infrastructure and property, which came in at 25 per cent.

Surprisingly, a considerable amount of ESG criteria is placed into hedge fund and private equity investments by Nordic institutional investors. These assets have frequently found themselves criticised for lack of transparency, but investors appear serious about making sure they follow ethical guidelines. More than 40 per cent apply ESG to private equity and 33 per cent for hedge funds.

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