Nordic institutions are slowly coming back to the investment markets. While pessimism and conservative strategies still dominate, there is evidence that funds are gradually getting more interested in riskier assets, and are moving away from bonds and cash. According to figures from nrpn’s quarterly investor survey, the largest portion (44 per cent) of Nordic pension funds remain negative on world growth prospects. However, this is a significant departure from last quarter’s survey where 80 per cent were pessimistic. Furthermore, three months ago, less than 10 per cent of respondents said they were optimistic, whereas now nearly 20 per cent think growth prospects are improving.

The sentiment is backed up by investment preferences. Safer assets like bonds and cash are losing favour to more volatile and speculative classes like equities, commodities and, once again, private equity. Nearly 60 per cent of respondents said they would raise their equity exposure, while the same amount intended to cut their bond holdings. Even within the bond investments, schemes are going for less conservative sectors. There is four times as much interest in riskier corporate and high-yield debt than safer and lower-yield government bonds. Unfortunately, this fixed income trend has not applied to emerging market debt, as no funds considered them to be the most interesting bond class for the next six months.

Yet, perhaps most indicative of the move away from conservatism was that not a single Nordic scheme said they would increase their cash allocation, with 35.3 per cent saying they would reduce the amount of cash in their portfolios.

In positive news for asset managers, Nordic schemes do not seem to have changed their generally favourable view on them. While fewer funds rated their managers as ‘good’ compared with last quarter, a small portion (6.3 per cent) rated them as ‘very good’, a figure that was at zero in last quarter’s survey. Furthermore, fewer schemes described their managers as poor compared to three months ago.

However, fear and uncertainty are still evident. Risto Murto, chief investment officer at the €24.5bn pension insurance company Varma, believes that this year will be less about allocation and more about risk management. Varma’s investments lost 15.2 per cent in 2008 and were particularly hammered by their equities (-36.6 per cent) and hedge funds (-26.3 per cent).

Therefore, it is not much of a surprise that almost a third of Nordic funds said they would cut back on their hedge fund investments, while only 12.5 per cent want to raise their exposure. Furthermore, apart from equities and bonds, the vast majority of institutions appear to be in a ‘wait and see’ mode as many investors are simply not making moves with their assets. This is especially true with forestry (88.2 per cent), infrastructure (75 per cent) and real estate (64.7 per cent).

Bjørn Hamre, director of KLP, the NKr201.8bn (€22.7bn) pension fund, says that while things remain uncertain, it will be difficult to be anything but conservative. He is keeping his fund largely defensive and bond heavy and has concerns over the high volatility of the equity market.

Yet recently, volatility has given way to a steady but small bull run in most equity markets. The survey showed that by and large schemes are encouraged by the rally and believe equity markets will continue to grow at decent levels.

Nordic funds are the most excited about emerging market equities, where the average scheme believes these stocks will grow by 5.4 per cent in the next six months. Some funds even went as far as forecasting growth of more than 15 per cent from this sector.

There is also a good deal of optimism surrounding Asian ex-Japan and US equities. For both regions’ stock markets, the average Nordic scheme predicts a growth of close to 5 per cent. While slightly less optimistic than for emerging markets, there is still a sizeable amount of funds that believe these markets will grow by double digits over the next two quarters.

The least amount of enthusiasm was reserved for Japanese and Eurozone equities, with the average Nordic scheme seeing a small gain of 2 per cent from these markets. This is actually a significant drop from last quarter’s survey where both zones were anticipated to grow by over 4 per cent. There was not a great amount of excitement over the domestic markets either, with forecasts averaging a gain of 2.8 per cent. This figure, however, could have been skewed by the Icelandic pension funds that participated in the survey.

Yet overall, investors appear set to put their money in emerging market and North American equities over the next six months. The survey showed that 31.8 per cent of funds were most interested in emerging market stocks, while 12.5 per cent chose North American. European and Japanese equities did not receive any votes of interest, and domestic markets only received 6.3 per cent of respondents. Importantly, a large percentage of schemes (31.3 per cent) said they were most interested in global equities. This could mean that many funds are not targeting a particular region, but instead are going to prefer to diversify their stock investments around the world.

nrpn’s quarterly survey covered 18 pension funds from five Nordic countries with total assets under management of €149.89bn.

Responsible investing

The Nordic region is renowned in the finance world for its appetite for environmental, social and governance (ESG) investments. However, this quarter’s survey showed that interest in ESG is not as widespread as many had thought. More than a third of respondents (35.3 per cent) said they do not use ESG criteria for any of their investments. While a large amount (58.8 per cent) uses these strategies for their equities, the result is nonetheless unexpected.

Ulrika Hasselgren, founding partner and president of ESG and SRI advisory firm Ethix, was not especially surprised by the results. She believes that the interest depends largely on the country. Her firm has collected evidence showing that Sweden is far above the rest of the region in this area, whereas Finland is lagging behind. That said, she is convinced that ESG and SRI have a bright future in the Nordic region.

Of the other asset classes where funds do use ESG criteria, hedge funds (11.8 per cent) and commodities (17.6 per cent) had the lowest figures.

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