Danish funds slowly warming up to equities again

COPENHAGEN — Danish pension plans are eagerly — but carefully — renewing their commitment to equities by boosting their exposures as the markets start to make a comeback.

Among those increasing their equity allocations actively after taking refuge in bonds for the last few years are ATP and PFA. Officials at one other — Pen-Sam, Farum, the 42 billion kroner ($6.78 billion) pension fund for medical support staff — would like to increase its equities exposure but does not have enough reserves to take more risk into its portfolio, said Michael Weischer, investment manager.

Many Danish pension plans dramatically cut their exposure to equities following regulatory changes two years ago by the Finanstilsynet, the Danish financial supervisory authority, which set up a system to monitor how close plans come to being able to cover their liabilities.

ATP, Hilleroed, the 276.4 billion kroner pension fund for the Danish labor market, is increasing its equity exposure to 20% from 15% of total assets this year. (Currently, domestic equities stands at 10.6% and foreign equities re at 4.8%.) Its long-term goal is to increase equities to 40% over the next several years, said Helle Holm Madsen, deputy chief investment officer. The fund's overall asset allocation is 79.7% bonds, 15.4% equities and the remainder in other assets, including real estate and private equity.

Most of the funding for the increase came from cutting the plan's European equities futures hedging activity. ATP also decreased its bond portfolio by five percentage points to 75% of total assets, said Henrik Jepsen, head of fixed income. Fund officials think that in the long run, equities will provide a stronger return than bonds, he said.

All of the new allocation will be to foreign equities. "It's easier to scale the foreign equities portfolio up and down in terms of risk management," said Mr. Jepsen, adding that ATP did just that between 2001 and 2003. The reduction in equity exposure then was primarily made in foreign equity because of the limited liquidity of the Danish equity market, said Mr. Jepsen. In 2001, ATP had 18% allocated to Danish equities and 27% to foreign equities; in 2003, ATP had 11.3% in Danish equities and 3.7% in foreign equities.

The fund reduced its equity exposure in 2002 because of the FSA funding requirements, but rising equity returns will allow ATP to build reserves, allowing "room for risky strategies," said Ms. Holm Madsen. No further details could be learned.

The fund is now able invest more of its assets in equities because it boosted its reserves to 39.7 billion kroner as of March 31, compared with 34.9 billion kroner as of Dec. 31. ATP is funded at 115.4%.

There are no plans to hire any new managers for the added equity allocation. Existing managers will benefit from the increase, said Ms. Holm Madsen. Currently, 35.3 billion kroner of ATP's 42.6 billion kroner equity portfolio is run in-house. The fund outsources 1.2 billion kroner of Western European equities to Hermes Focus Asset Management Ltd., London; Mellon Global Investments, F&C Management Ltd. and Schroder Investment Management Ltd., all of London, each runs about a third of a 3.2 billion kroner global emerging markets equity portfolio; Danske Capital, Copenhagen, handles roughly 1.3 billion kroner in U.S. equities; and Martin Currie Investment Management Ltd., Edinburgh, and Capital International, Ltd., London, each manage roughly 75 million kroner in Japanese equities.

Knud Grooss, an independent consultant based in Roedovre, said another reason for the renewed popularity of equities is that many pension funds that drastically reduced their equity allocations following the burst of the technology bubble have decided it's safe to go back into the water.

"This is a cautious trend," emphasized Hasse Jorgensen, chief investment officer of the 165 billion kroner PFA Pension, Copenhagen. The corporate pension plan for employees of the Danish insurance group has increased its equity exposure to 10% from 6.8% at the end of 2003. Pension professionals remain uncertain about the markets but recognize that equity exposure may still be a viable means to strengthen a fund's reserves, he said.

Mr. Jorgensen pointed out that in 2001, PFA slashed its equities portfolio from 38% of assets to just less than 7% because of the downturn in the market and the new funding rules from Finanstilsynet. The fund recently edged back into the stock market with a new 3 billion kroner foreign equity portfolio and a portfolio of unlisted Danish equities, according to its annual report for 2003. Further details could not be learned.