PensionDanmark is resigned to a “protracted” period of low bond yields and expects only limited relief in future – but has warned that its resulting focus on alternatives will not see it acquire assets at any cost.
Torben Möger Pedersen, chief executive of the €23bn Danish labour-market pension fund, told IP Real Estate: “Because of the low inflation rates, but also because of the ECB’s (European Central Bank) QE policy, we will have low bond yields for a protracted period of time.”
This is PensionDanmark’s basis scenario and the reason why it has a strategic focus on alternative investments, he said.
“Maybe [yields] are a bit too low, but the rise we expect is quite limited, and we don’t expect a return to a high bond interest rate environment,” he said.
Speaking at today’s IP Real Estate Global Conference in Copenhagen about PensionDanmark’s investments in alternative investment – which include real estate, infrastructure and renewables – Möger Pedersen explained how the fund’s approach to such investments had developed over the years.
“In the early days, we were not willing to take on construction risk, but during the last couple of years, we have built up our capabilities in this area and are now able to take on some construction risk,” he said.
The pension fund did not look to take on leverage as part of these investment deals, as it could include this type of exposure in other areas of the portfolio, he said.
The necessary skills have been built up in-house for these alternative investments, he added.
“We have increased the speed of our investment process and now have a relatively large capacity to deal with a number of parallel transactions,” he said.
Returns on PensionDanmark’s infrastructure investments have been relatively stable at 6-7%, the chief executive noted.
Within real estate, too, the pension fund proved able to fulfil its expectations of stable return and low correlation with equity markets, and had been be able to resist the impact of low bonds yields.
“We have been able to achieve returns of 5-7% in each of the last five years,” he said.
Speaking from the pension fund’s experience of these alternative assets, Möger Pedersen said investors had to accept some concentration risk in their infrastructure portfolios and some home bias.
“You must be willing to walk away […] if assets get overpriced,” he said.
Möger Pedersen said that though liquidity was an issue with the alternative investments PensionDanmark has built up in its portfolio, the nature of cashflows at the pension fund means it could support the 20% allocation it now has to the asset class.
“We have a very rapid rise in total assets under management, so liquidity is a short-term issue for us,” Möger Pedersen said.
“We will be able to honour all our commitments by the steady income stream of contributions and our liquid investments.
“The issue of liquidity was one of the reasons why the fund had limited its exposure to these assets to 20% of the total portfolio.
“This is relatively high compared with our peers, but it is prudent when we take into account how are assets are increasing.”
He added that these assets gave the overall portfolio a high level of stability of returns and freed up the risk budget.