Private equity has made a swift comeback as one of the Nordic region’s favourite asset classes. The results of nrpn’s latest quarterly investor survey, which polled 17 Nordic pension funds, shows a dramatic increase in investors planning to invest in private equity. The previous survey, conducted in November last year, barely showed any interest at all in private equity. Only one brave investor went against the grain and said it planned to increase its exposure to the asset class. This time around, almost half of respondents (44 per cent) said they were planning to raise their private equity exposure over the next six months. Not one pension fund plans to reduce its exposure to the asset class.

The findings of the survey are taking the industry by surprise. Søren Andersen, chief executive officer at the Danish consultancy Invensure, is puzzled. He says: “My impression is that most pension funds are doing absolutely nothing. It’s just a matter of holding your breath and seeing what happens. At the same time, private equity certainly is an important part of most pension funds strategic asset allocation.”

Rune Sanbeck, head of the Nordic region at Barclays Global Investors, is even more bewildered about why pension funds would consider ploughing more money into the private equity market as it continues to fall.

“The only reason I can see is that the private equity share of most portfolios has gone up in value as a result of the fall in equity markets. Even if the private equity market has also tumbled, it is difficult to estimate the true value of a private equity fund since it’s not mark to market. That could explain why pension funds say they will increase their allocation, even though it is the proportions that have or will change,” he says.

Despite the turbulence that has hit the hedge fund market, Nordic pension funds seem unlikely to abandon the asset class. Some 12.5 per cent of investors even plan to increase their hedge fund investments. Furthermore, more than 60 per cent of respondents are planning to stick to their hedge fund strategies over the next six months, but those results may be unreliable as that also may include investors without any exposure to the asset class. Only 25 per cent of funds surveyed intend to divest from hedge funds, which has to be regarded as a low figure given recent developments.

Fixed income is still the area in which most investors plan to increase their exposure. About 65 per cent of respondents are planning to raise their bond allocation during the next six months. While fixed income has undoubtedely been the asset class that pension funds have moved to protect assets and minimise losses over the past year, some are now starting to look for opportunities elsewhere. Just under a third of investors are actually planning to reduce their exposure to bonds.

There is also a change in the popularity of different bond classes and an indication that pension funds might have started shying away from government bonds. Only 12 per cent of investors believe government bonds will be the most interesting bond class going forward, compared with 20 per cent in November. This is probably related to the drop in returns from government bonds at the same time as the riskiness of the asset class has gone up. Emerging market debt is still a bond class that investors view with caution. Instead, the investments are likely to go into the corporate and high-yield bond markets. More than 50 per cent of respondents believe that corporate bonds will be the most interesting bond class over the next months and 35 per cent believe in high-yield bonds. The results are supported by BGI’s Mr Sanbeck. He says: “We’re seeing increased interest for investment-grade corporate bonds. Many are also getting ready to move into high yield. Some have already started dipping their toes, but those who went in too early could be hesitating.”

However, it is difficult to single out any sharp investment trends for the region’s pension funds, apart from increased interest in both private equity and fixed income. However, that could soon change as pension funds will be forced to make plans for the year ahead.

“I don’t foresee any major trends at the moment, but many pension funds are having board meetings at the moment and will have to decide on the asset allocation for the near future,” says Invensure’s Mr Andersen.

The performance of external managers still remains an issue. More than half of the respondents rated the performance of managers as ‘satisfactory’, with one fund even saying that performace was ‘poor’. No investor rated the performance as ‘very good’. Dissatisfaction with appointed asset managers has for a while been a cause for concern and several pension funds are considering changing their appointed asset managers. More than 60 per cent of respondents are planning to ditch external managers due to unsatisfactory performance. As a result, Mr Sanbeck says there has been an increasing interest for passive management.

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