Pædagogernes Pension, PBU, the €9.5 billion ($10.5 billion) Danish defined contribution scheme for early childhood teachers is in the process of consolidating and reducing the number of managers in its listed equity portfolio. The decision at the fund which has around 10 large, focused equity mandates is linked to an ambition to reduce the number of companies in the portfolio in the belief that fewer companies in the 42 per cent equity allocation which is all actively managed allows greater ESG oversight.
“We don’t know how many managers we will end up with in listed equity yet, but we will have fewer in the years to come than what we have now. Only this way can we be sufficiently knowledgeable about our portfolio,” explains CIO Carsten Warren Petersen who was promoted to CIO last year after previous roles heading up equity and credit at the Copenhagen-based pension fund and is currently in the process of reaching out to PBU’s manager cohort.
The new strategy is being driven by PBU’s switch in focus to ensure all its managers have an ESG dimension rather than just focus on risk adjusted returns. New mandates will be allocated in line with a manager’s ESG credentials and ability to engage with companies on specific ESG factors. Petersen is also looking for heightened engagement between managers and the fund, he explains.
“We are asking our managers for a much more integrated approach between them and us. We want to be informed to a higher degree than before: when they invest in a company, we want to know what they are doing in terms of active ownership and if they are truly knowledgeable about that company in terms of ESG.”
The approach also reflects the fund’s ambition to have more control over ESG integration – and take more responsibility.
“You can’t hide behind an external manager. You need to know what is going on and what type of companies are in the portfolio. We want to be able to truthfully call ourselves a responsible investor; this means we need to know more about where we are invested which means fewer companies and fewer managers.”
Petersen is also thinking about how to apply the same strategy to PBU’s 40 per cent fixed income allocation that includes sovereign and corporate bonds. It is a more complicated process, however.
“It is a different ball game in terms of interaction between managers and companies in bonds compared to equities – managers’ contact with companies they are invested in is different on the debt side to the equity side.”
Influencing sovereign behaviour via government bond investment is also challenging. Although it’s possible to filter out sovereigns with for example poor human rights records, he says acting together with other investors is one approach. “Individual investors can reach out to a country but it’s very different to reaching out to a company. If investors want to influence a country, they must act with other investors to influence behaviour.”
Liquidity is key
PBU has small allocations to infrastructure and real estate, preferring instead listed, liquid markets where Petersen finds the agility he favours, and that allows him to work with the allocation if the market environment changes. “We adjust the portfolio according to market circumstances, so we have a high level of liquidity compared to our peers. We think we can create a well-diversified portfolio by having a large exposure to the listed space.”
Despite his eye on the late cycle and increased risk levels, he is not paring back the equity allocation which is weighted so that younger (the under 45s) savers have around 60 per cent of their portfolio in equity risk compared to older (the over 65s) where it hovers around 20 per cent.
“For the time being our view is that equity is still a good place to be – it has certainly benefited us over the past three years. Compared to others, on a risk adjusted basis we are in a good position and there is nowhere to hide until interest rates are higher.”
Asset valuations are impacted by low risk-free rates so that highly sensitive assets, particularly real estate and infrastructure, have increased significantly in value as rates have dropped, he explains.
“Alternative assets still yield a higher return than risk free rates but that reflects a higher risk, so investors are not hiding, but taking on other types of risk.”
The fund has returned 6.1 per cent on average since 2003.
He does note the impact of the ongoing trade war between the US and China hitting returns in the equity allocation. PBU has a 5 per cent allocation to mainland Chinese companies with a focus in large cap and small to mid-cap where the same stringent ESG criteria apply. He also notes the shift in supply chains by Chinese companies to new locations like Vietnam, having an impact.
“Companies are moving their supply chains and it takes time for things to run efficiently after reallocating.”
Petersen takes care to not deviate too far tactically from risk levels set by the board to ensure risk is set at the level beneficiaries expect.
“We have to be careful not to deviate too much tactically because otherwise we are no longer delivering the kind of risk we have indicated to beneficiaries.”
He is in the process of strengthening the fund’s quantitative risk analysis team which focuses on risk and portfolio construction. The current investment team is around seven-strong, but all allocations are outsourced, with the exception of the 9 per cent real estate allocation which is run in-house.
