Danish funds have seen significant inflows into foreign equity funds; most increases are in Latin America and Emerging Markets funds (as well as Far East ex-Japan). Apart from European bonds, a similar development can be seen for fixed income investments.
Danish asset managers benefit from investors’ trust in local expertise and one can notice an increase in discretionary mandates handed out. Specialized investments however require the Danish managers to use international asset managers (for regional, industry or asset class specific allocations).
News Roundup
• Solvency II: The introduction of the strict requirements of Solvency II means that all institutions have to either follow the standard capital adequacy rules or create an alternative set of internal guidelines.
• Ucits III: There has been a flood of Ucits III hedge funds, which has forced a re-evaluation of these liquid variants of hedge strategies within the institutional industry
Hot Topics
What everyone is talking about
• Emerging Market Debt: local v hard currency
• Fixed Income assets: high yield vs. inv grade
• Liability hedging: efficiently reducing exposure
• China: room to grow or time to exit?
• Growth strategies: where are the big stories?
• US equities: budget will be interesting
• PIIGS: a looming currency crisis?
Key points of the four biggest interviews
External manager, leading supplier of corporate pension plans
• Solvency II will lead the way
• Newcits will be interesting
• What other alternatives are out there?
Equity strategist, leading occupational pension fund
• It’s tempting to look at increasing the amount of illiquid assets
• But capital requirements will be high (Solvency II).
Macro analyst, strategic and tactical advisory services provider
• Economy is more robust than many anticipate
• Equities will be back up, maybe higher than before (in autumn)
• Why no PIIGS crisis in Northern Europe?
Investment consultant, leading financial services provider
• Interest in SRI is increasing
• Open architecture a success
• Growth of assets for EMD is substantial
Investor appetite
DB and DC
For the many pension funds with a high defined benefit quotient, fixed income investments remain of course very important no matter what their long-term bond view is.
Consequently most institutional investors are in effect looking after two portfolios: DB, which is therefore very conservative, often includes interested rate hedges and the like; and DC, which uses its freedom to look for higher returns from more interesting assets.
DC portfolios consist of a wider variety of bonds (e.g. Danish gov, global inv grade, US mortgage) as well as a higher proportion of equities and alternatives.
Active v passive
An important issue for investors is the debate about using active managers. Since 2008, performance has been unsatisfactory and our interviewees didn’t feel convinced that they could consistently add value.
The ETF concept has yet to really take off in Denmark. However, interviewees were mostly eager to look at ETFs again, so we expect this sector will gain, not only because of the product features (e.g. lower costs/fees, close index-tracking, tradable, etc) but also because this segment is still significantly smaller than both the regular traditional passive fund and also the active sectors.
Asset allocation
Danish investors have found that looking after asset allocation internally is beneficial. Previously, they would allow local players to manage the whole portfolio, including making asset allocation decisions and outsourcing to third party fund amnagers when they didn’t have the expertise.
Now an increasing number are doing in-house asset allocation and simply instructing the asset managers to implement it. Fund managers should look into supporting investors by providing them with in-house research that could be useful to the client asset allocation teams.
Asset Classes
Developed markets
Institutional investors in Denmark that we spoke to believe the developed equity markets have bottomed out.
Even though the PIIGS crisis interrupted the recovery, and European equity markets are generally not favoured, investors believe that most equity markets will continue to improve at least over the next four months. Importantly, this is an upturn not reliant on gearing but a reflection of true economic growth.
This improvement in the outlook of equities combined with a general increase in interest in alternatives has pushed investors to reduce developed market bond exposure.
Other favoured asset classes include US equities (on the back of the positive economic outlook in the US) and convertibles bonds.
Emerging markets
This consensus is not true of emerging markets (both debt and equity) which pretty evenly divide most investors into strong bear and strong bull camps. Both bulls and bears, however, agree that local currency is the best way to access emerging market debt.
Investors interested in emerging market equities are increasingly making strong country choices rather than using a global approach.
Ethical investing
Danish investors are continuing their interest in Ethical investing, following the trend of using green funds, the broader corporate social governance funds and the even bigger picture Socially Responsible Investing strategies. Any innovation in this area gets a good hearing in Denmark.
Alternatives
The Danish investors we talked to expect to see an increase in assets in the alternatives space. Hedge Funds and Newcits as well as commodities are of interest, but transparency and risk remain concerns with these new strategies.
Private equity and real estate seem be on the rise as well. However, Solvency II requirements such as minimum capital requirements mean that pension funds need to be very careful when they use illiquid asset classes – how will it change their capital at risk?
Challenges
Our interview partners, particularly institutional investors, are considering Solvency II and its consequences as the most important development for the next years until its launch date on 31st Dec 2012.
Most institutions have started to plan for the requirements and how they will affect investments. Furthermore, Danish investors are using both international and domestic fund managers.
Although working with local product providers is an obvious choice, investors are increasingly handing out discretionary mandates, so domestic asset managers use international and/or specialized boutiques to access certain asset classes or regions.
