COPENHAGEN - Three of Denmark's largest industrywide pension plans teamed up to invest in global high-yield bonds and are cutting their holdings in Danish government fixed income.
In January, the three plans jointly hired T. Rowe Price Global Investment Services, London, to manage a pooled global high-yield bond mandate with initial assets of 1.5 billion Danish krone ($180 million) as part of an attempt to improve fund returns and diversify portfolios. Another 300 million krone has been promised.
Local consultants and money managers said other Danish plans are likely to follow suit by upping their allocations to global corporate bonds. Spreads on U.S. high-yield bonds are looking particularly attractive, they said.
The three schemes, all based in Copenhagen, are:
* the 35 billion krone Laegernes Pensionskasse, for Danish doctors;
* the 21 billion krone Dansk Ingeniorforenings Pensionskasse, for Danish chemical, civil, electrical and mechanical engineers; and
* the 18.5 billion krone Pensionskassen for Juristernes og Okonomernes, covering lawyers and economists.
The mandates will be funded over the next few months as each plan unwinds some of its current holdings in Danish government bonds. Representatives of the three plans would not say by how much they planned to reduce their domestic bond exposures, but Danish consultants reckon it is on average around 80% of total fixed-income portfolios.
Cooperation unusual
It is relatively unusual to see separate pension plans team up to search for and hire new managers. It is unclear whether these three plans will work together to hire managers in the future.
Erik Veedfald, chief investment officer for the lawyers' and economists' pension plan, said a full-scale merger of the three funds is not the intention. The plan is to allocate just less than 400 million krone to the high-yield mandate.
The plan for engineers is to invest about 2% of total plan assets - about 420 million krone - in corporate bonds, according to Soli Preuthun, newly appointed head of investments at the plan.
She said there have been cost savings in issuing a joint mandate for the same asset class. "These professional pension plans are a little alike. Why should we not use each others' know-how?" she added.
Claus Stampe, chief investment officer for the doctors' pension plan, said the decision to award a joint mandate had come naturally.
"We have rather a small internal investment team. ... It makes sense to do something in common," he said. The internal team is responsible for managing about 80% of the plan's fixed-income assets, most of which are invested in Danish government bonds.
Mr. Stampe expects to invest about 1 billion krone, or 7% of the fund's 45% fixed-income allocation, in corporate bonds. The corporate bond portfolio has not yet been fully funded, however, as the plan is busy unwinding some of its domestic bond holdings.
80% in U.S. corporates
The pooled fund was set up especially for the three Danish plans and will allocate around 80% of the assets to U.S. corporate bonds. The allocation to the United States will fall over time as the European corporate bond market grows, said Thomas Pedersen managing director Europe, Middle East and Africa at T. Rowe Price Global.
Interest in high-yield bonds from the Danish market has been so marked of late that T. Rowe Price is to launch another pooled corporate bond fund for seven smaller industrywide pensions funds, he said. He would not give their names.
Historically, Danish pension plans have been weighted heavily toward fixed income, and Danish government bonds in particular. But now pension plans across the region are looking to invest more in equities and diversify their bond portfolios, according to Simon Barrett, assistant director-Nordic business development at Dresdner RCM Global Investors Ltd., London.
Last year's equalization of tax rates on fixed income and equity has made it easier to invest in international bonds (Pensions & Investments, Nov. 13), but this is not the main reason for the general change in asset allocation by Danish plans.
But it is likely the previously higher tax rate on fixed income acted as a barrier to investing in corporate bonds, said Gareth Derbyshire, executive director at Morgan Stanley Dean Witter European Pensions Group, London.
Ms. Prethun and Mr. Stampe said their plans are looking for greater diversification in their investment portfolios and are hoping to generate returns above those of equities.
"High yield has certainly come into fashion; it's a good risk diversifier," said local consultant Jesper Kirstein, managing director of Kirstein Finance, Copenhagen.
Income guarantee
Danish pension plans have to provide a minimum income guarantee on retirement benefits. Plans set up in the past five to six years have to give a minimum return on investments of 2.5%, while older plans are obliged to provide a return of 4%. The decision to invest in corporate bonds was not driven by the need to meet the guarantees, said Ms. Prethun. Most Danish plans had relatively robust performance in 2000 and have funds in reserve. Mr. Kirstein estimates investment returns from Danish pension plans will be between zero and 10% for 2000. Denmark's stock market performed relatively well in 2000 compared with those of other countries.
"The guarantee is not a hot issue. The tax change made it easier to invest in all asset classes but has only postponed, not solved, the problem of meeting the guarantee," said Steen Villemoes, Nordic Markets representative at Altius Associates, Copenhagen.
The tax changes also have made it easier to invest in private equity, according to Ms Prethun. Many Danish plans started investing in private equity around two years ago and likely will accelerate their programs now that the tax system has been simplified. The engineers' scheme invests around 210 million krone, about 1% of total assets, in private equity with Altius Associates Ltd., London. The plan hopes to increase that allocation to 3% of assets in the next two years.
