Danish pension fund seeks higher returns in alternative investments

COPENHAGEN • The biggest commercial pension provider in Denmark has had enough of external funds and is instead using its own people to chase higher returns in alternative investments.

Chief executive of PFA Pension in Copenhagen Allan Polack says relying on outside managers is "simply too costly" a model. He also says some of the external firms had "become very, very demanding".

Mr Polack is the second executive of a major Danish fund to have spoken out on the subject recently. At Danske Bank's pension arm, chief investment officer Anders Svennesen is curbing the use of hedge funds. Both men represent a pension system that is ranked the best in the world, based on country studies of funding adequacy.

Insurers and pension funds are the largest customers of the asset management sector, according to the European Fund and Asset Management Association. Last year, their assets constituted 37 per cent of total net assets of investment funds held by euro-area investors.

As recently as May last year, some of the biggest Nordic private equity firms said they were still being inundated by cash from institutional investors eager to improve their returns.

Back then, EQT managing partner Thomas von Koch said capital raising in his industry was at an "exuberant" level and warned that things could change quickly. About 23 per cent of the US$113 billion (S$155 billion) in assets that PFA holds are in alternative products like infrastructure and wind farms. Mr Polack says he wants to raise the figure to 30 per cent to lift returns. "We all know we can't really use the bond as an asset class now," he says. "You can't retire" on the returns that bonds provide, he adds. "It's extremely low returns, so we are shifting into other kinds of asset classes."

Equities remain a lucrative investment. Returns in the second quarter show "most companies are doing very well, full of optimism, so we are definitely not giving up on this", he says. "However, we're more cautious on the fixed-income market, and that's why we shifted away from that." PFA has said it wants real estate to make up a much bigger chunk of its portfolio.

It made its biggest investment in the property market last month, putting over US$1 billion in assets in Germany to expand its portfolio to more than US$9 billion. The fund's plan is to raise its exposure "significantly" through 2022.

PFA has also gradually built up its own expertise in alternative investments over the past three years and will lean on that to expand its holdings of the asset class, Mr Polack says.

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A version of this article appeared in the print edition of The Straits Times on September 04, 2018, with the headline 'Danish pension fund seeks higher returns in alternative investments'. Print Edition | Subscribe