Norwegian pensions have tended to adapt a careful approach to investment but following the financial meltdown, has this proved successful? Giovanni Legorano reports
Norwegian corporate pension funds chose to stick to the equity allocations they had two years ago hoping market rebounds fixed the losses they incurred during the crisis.
The move differentiated them from most pension funds and institutional investors around the world, which in several instances rebalanced towards fixed income and money market funds in a bid to limit losses.
Emerging markets and alternatives were on the rise in the last 12 months
Mercer principal Nicolai Berg said the cost of switching to different asset classes might be the reason behind the static approach of several pension funds. He said: “Different pension funds have different sponsors. Those with a sponsor who doesn’t want to receive an extra invoice sold off equities in the downturn while the others that had enough risk capacity, held on to their investments in equities.”
According to preliminary data compiled by the Association of Norwegian Pension Funds (NPF), corporate schemes held 54% of their assets in bonds, 32% in equities, 10% in others (derivatives, bank deposits and alternatives) and 4% in property in 2009. At the end of 2008 bonds holdings were 66%, equities 22%, others 6% and property 6%.
NPF secretary general Rolf Skomsvold pointed out the weightings changed from one year to the other mainly due to falls in equity valuations.
That data shows the situation at the end of 2009 broadly mirrored the schemes’ overall asset allocation two years ago, which saw 53% of portfolios allocated to bonds, 33% to equities, 9% to others and 5% to property.
Grieg Investor chief executive Øistein Medlien commented that the heavy losses pension funds suffered during the crisis have only partially been recuperated. As a consequence, he said it will take them some time before they think about rebalancing their portfolio towards previous equity holdings. He said: “They will need to recuperate more buffer capital which was eroded by the crisis. Last year’s market performance allowed them to recuperate some losses, but they still need more time.”
Although Norwegian schemes have traditionally been very cautious, some industry figures are seeing some signs schemes are increasingly looking at riskier assets as well as abandoning a bias towards national assets they tended to have in the past.
NPF’s Skomsvold said the country’s smaller pension funds would have little or no foreign exposure, particularly in the fixed income space, due to difficulties in hedging foreign exchange risk.
However, experts noticed small steps towards riskier exposures. T. Rowe Price director, business development, Northern Europe Jan Eggertsen said “emerging markets and alternatives were on the rise in the last 12 months”.
He noted: “Pension funds are not allowed to have more than 7% of their portfolio invested in alternative investments. This would include real estate, private equity, hedge funds, absolute returns strategies and, at times, even emerging markets.”
In addition, Eggertsen said each asset class within the 7% limit cannot represent more than 1% of the overall portfolio. This, he said, excluded hedge funds from the horizon of most schemes, as the amount of time needed to manage an allocation to a hedge fund does not justify the benefit a scheme can receive.
This leaves schemes with foreign property, private equity, convertibles and emerging markets.
Infrastructure can represent a much welcomed novelty in schemes’ investment landscape. Skomsvold told GP the minister of finance Sigbjørn Johnsen told delegates at April’s NPF conference the current limit on infrastructure investment of 5% of total portfolio will be lifted in the future.
Skomsvold said this was an asset class on which pension funds have shown increasing interest.
Schroders country head of the Nordics Ketil Petersen said there was “more appetite” for equities by Norwegian pension funds. In particular he said they were receiving questions on global equities rather than regional ones. He added environmental, social and governance considerations were also shaping the way the country’s funds looked at investments. He said: “Norway’s oil fund is leading the way on this. All the others are following.”
The Centre for Social Justice is calling for the state pension age to be raised to 70 by 2028 and to 75 by 2035, a much faster rise than currently planned.
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