The US$161 billion California State Teachers’ Retirement System (CalSTRS) is set to vote next week on a proposal which would see $6 billion tactically invested in the debt markets, as well as the conception of a new “innovation portfolio”.
One of Denmark’s largest industry funds, PensionDanmark is embracing the opportunities presented in the current climate, and has increased allocations to credit. Amanda White spoke to the fund’s CEO, Torben Pedersen, about its investment strategy.
Torben Pedersen, chief executive of PensionDanmark, is upbeat, and perhaps a little opportunistic. While on paper, the fund is sceptical about the world economy, the board, and Pedersen, are embracing the opportunities that presents dramatically increasing the fund’s allocation to credit.
At the end of 2008, when the last annual strategic asset allocation review was undertaken, credit allocations were around 6 per cent. As of this month credit now accounts for 12 per cent of the portfolio.
When this most recent change was made it was also decided to decrease listed equities from about 35 per cent to 15 per cent, with a number of mandates terminated as a result.
“We reviewed our overall asset allocation in December last year, as per the annual review, and then because of current market conditions we did it again earlier this year, and have agreed with the board and the investment committee to conduct quarterly reviews,” Pedersen says.
The fund, which has 540,000 members and 9.4 billion euros in assets (US$11.8 billion), will continue reviewing its asset allocation on a quarterly basis until investment markets are considered by its team to be ‘more stable’.
In addition to the reduction in equities and increase in credit, the fund has also allocated about 20 per cent of its portfolio to inflation-protected investments (which includes real estate, infrastructure and indexed-linked bonds), with bonds overall accounting for about 53 per cent.
The fund, which ranks among the top 250 in the world by size, has a strong focus on outsourcing including part of its portfolio management and back office.
There are 75 staff in total, including about 12 in investments, headed by chief investment officer, Claus Stampe.
The team manages about 70 per cent of the credit products internally and passive equities in US large cap, Europe, Japan, and emerging markets are also managed in-house. The fund is fully hedged to the US dollar.
“We still prefer to use external funds managers for active mandates and internal for passive, and we will continue with that,” Pedersen says. “Our new asset allocation means that for a period we will reduce the number of external equities managers.”
In addition, a by-product of the new asset allocation is a reduction in fee levels, with more money allocated to the more basis point-friendly asset classes.
“That’s not the primary reason but it is a welcome by-product,” Pedersen says.
The fund, is however, conscious of costs, and is cognisant there are always ways to make the running of the fund more efficient.
“There is always a chance to do things smarter and more cost effectively, and with low rates of returns on investments, then reducing administration costs will become a focus for funds,” he says.
Pedersen says the philosophy is to outsource labour intensive and long-term processes and about 75 per cent of the administration budget is spent on outsourced partners.
The fund is also looking at ways to use the advanced digital infrastructure in Denmark, and Pedersen has a vision to become the first form-free pension fund in Denmark.
In the past couple of years the Danish pension industry has seen a number of mergers in part to benefit from economies of scale, and Perdersen believes that will continue.
PensionDanmark’s funds managers
The fund’s managers include: T Rowe Price and MacKay Shields for global high yield; BankInvest and BlueBay Asset Management for emerging markets debt; Credit Suisse, ING, Eden Rock, Goldman Sachs Mezzanine and TCW Energy Fund for credit; Carnegie Asset Management, Marathon Asset Management and Nordea Investment Management for active global equities; Lazard and JP Morgan for North American equities; Hermes Focus Asset Management, Netptune, and TT International for continental Europe; State Street for emerging market equities; and Acadian Asset Management for Japanese equities.
Chief executive of PensionDanmark, Torben Pedersen, is available to take questions from fellow top1000funds.com users. To email him with queries about his fund’s investment strategy or related fund issues please click here
PensionDanmark
PensionDanmark is a Danish industry fund with 540,000 members who are employed in 35,000 private and public companies. The largest sectors covered by PensionDanmark are construction, transportation, hotels and restaurants, cleaning, agriculture and dairies.
Assets: DKr70.4 billion (US $1.1 billion)
Asset Allocation: (January 2009)
Equities: 15%
Credit: 12%
Inflation-protected investments: 20%
Bonds: 53%
In the CFA Institute’s new Investment Performance Measurement newsletter, launched this month David Spaulding, president The Spaulding Group, and Steven Stone, partner at Morgan, Lewis & Bockius discuss the issues concerning the use of theoretical performance, summarise the regulatory implications and risks of using such presentations, and suggest best practices and appropriate disclosures.
Canada’s ministry of finance will begin public consultations on the legislative and regulatory framework for federally regulated private pension plans in mid-March.
Defined contribution company plans began 2009 on the heels of a bruising year. The significant decline in capital markets coupled with extreme investment volatility raises many issues for companies with DC plans. There are numerous issues employers/plan trustees need to address when reviewing their plans this year. These range from the plan’s governance to the choice of low-risk investment options. Mercer’s Dublin office has prepared a 10 point plan that employers and trustees could potentially adopt as they re-evaluate their DC plans and related responsibilities in 2009.
- Review the adequacy of DC benefits and consider whether current pension provision is meeting employees’ needs. Economic conditions and future expectations have changed considerably since many DC arrangements were designed. Depending on their ages and time horizons, members may need to adjust their expectations of retirement income. Employers may also need to assess the workforce management implications.
- Review DC provider performance. The market for DC provision has evolved with new providers and products entering the market while others exit. Trustees should consider if the existing arrangements continue to meet the investment needs of all members and if performance continues to meet the objectives set when selected.
- Review the suitability of investment options. Poor investment choice is likely to be one of the main issues impacting members’ benefits and trustees should consider the current options available to members in light of new industry developments. If the investment range has not been reviewed for some time, consider the membership profile, how this might have changed, how members are making investment decisions and whether the existing range includes a facility for members to manage their investment needs over time.
- Review the default investment option. A feature of most DC plans is that the majority of members “end up” invested in the default option; this makes it crucially important for trustees and members. Is it effective in varying investment conditions and over time for members’ changing investment needs? Does it protect members who are close to retirement from annuity risk or market risk, while at the same time catering for members with longer time horizons? As DC schemes develop, the member population becomes more diversified, and consequently the existing default option may no longer cater for all groups of members. There may also be an opportunity to improve the efficiency of the default option (in terms of the risk/reward trade off), given the wider range of investment vehicles now available.
- Monitor the choices being made by individual plan members (not in aggregate). Review individual member asset allocations and/or individual members’ rates of return. This type of review can provide good insight into whether your DC plan is working, and can point out areas for improvement, such as member education or fund choices.
- Assess the effectiveness of your member communications strategy. This is a good time to revisit financial and investment education. Given the market turbulence and economic uncertainty, what information should be provided to plan participants?
- Review and revise your plan’s Statement of Investment Policy Principles (SIPP). In the current market environment, fiduciary risk is high and a review of the SIPP can help minimise this risk.
- Ascertain if your plan members are engaged at all. Are they knowledgeable about their savings and retirement plan choices? Given the recent market volatility and economic turmoil, this is a good time to revisit engagement and education about investing and retirement planning. Larger employers/trustees may wish to consider focus groups to find out what members see as their challenges, education needs and barriers to understanding.
- Assess what kind of retirement income or replacement ratio employees can expect from the plan. If this is projected to be lower than previously expected, action is required sooner rather than later. Consider revising the scheme design, allowing additional member contributions, or reinforcing the importance of saving more outside the plan in order to secure a comfortable retirement for members.
- Review the stability and risk exposures of investment managers in light of the current economic turmoil. Consider the status of the plan’s investment managers(s) and their commitment to continue to develop their offerings to meet member needs.
Alternative asset investors, particularly hedge fund investors, must remember that investment performance of an asset manager should never be the sole or even primary consideration when making an investment decision. In fact, during recent years, qualitative factors have been the root cause of failure for nearly half of all hedge funds that have experienced forced liquidations.
In evaluating alternative investment managers, prospective and existing investors must consider the overall due diligence process as an integrated three-ponged approach in which risk-reward analysis is combined with investment thesis review as well as operational due diligence. This paper, by Ennis Knupp & Associates, provides investors with a top10 list of critical questions to ask when assessing hedge fund managers.