DENMARK - Taking advantage of the buoyant Danish equity market, Danish pension funds have returned to the equity markets, increasing their share in equities, while reducing allocation to bonds.
This is one of the main findings of Nykredit Markets quarterly survey into investment trends in the insurance and pension fund markets. The survey is conducted in co-operation with Greens Institute of Market Research.
Allocation to equities rose from 18.5% in October 2004 to current levels of 23.9%, while allocation to bonds dipped from 68.9% to 60.6%.
John Madsen, head of research at Nykredit, said: “Pensions funds are convinced about the strength of the global recovery and have as a consequence increased their exposure in equities.”
Pension funds have also increased their share of government bonds to 49.4% from 37.5% in October and at the same time, allocations to mortgage bonds have been reduced from 52.6% to 45.8%.
Madsen commented that the increased share of government bonds may be due to low yield levels and the reduced duration of mortgage bond positions.
“Four percent MGT 2025 and 4% MTG 2035 were the only real alternatives in the mortgage bond segment,” he said.
The report noted that pension funds’ portfolios still continued to be “massively overweight” in DKK denominated bonds, but this share has been declining heavily compared with October 2004, falling to 53.4% from 69.8%. EUR-denominated bonds, however, have registered a sharp rise, increasing from 14.8% in October to 39.8%.
Madsen added: “Euro government bonds account for the majority of the bond portfolio in foreign currency. The increased demand for foreign bonds is probably due to the decline in the duration of Danish mortgage bonds. The significant change compared with October may as well be due to the preceding spread narrowing in Danish government bonds relative to the German market. Pension funds do no expect the outperformance of Danish government bonds to continue.”
The report said that in terms of assets, pension fund had experienced a “very favourable” period with high returns on both equities and bonds.
“In terms of liabilities, the yield will have resulted in considerable losses for investors who have not hedge of pension liabilities through interest rate derivatives. Consequently, the total performance depends on the management of the liabilities side,” the report added.
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