Issue 1, 2016

The Nordic pension and investment landscape is navigating complex challenges and opportunities across various fronts, as illustrated by recent developments in regulation, strategy adaptation, and market outlooks. Swedish AP funds face a political deadlock impeding reforms to liberalize investment restrictions, while Finnish state pension funds like VER have creatively expanded asset class definitions to increase alternative asset investments without changing limits. Meanwhile, Danish ATP has adopted a risk factor-based portfolio approach, emphasizing precise exposure measurements to manage diversification risks and boosting direct illiquid investments. Finnish pension insurers Varma and Ilmarinen are diversifying their real estate portfolios globally amid economic uncertainty at home, while Swedish institutional investors are sharpening focus on sustainability governance, with carbon footprinting and board composition emerging as key agenda items for 2016 AGMs.

Emerging market equities remain a focal point for Nordic investors amid macroeconomic uncertainties, with managers highlighting opportunities arising from attractive valuations despite volatile commodity prices and reform challenges in some countries. Fund selectors emphasize differentiating skill from luck through rigorous analysis, while also noting capacity constraints and ESG considerations. The regulatory environment, especially Solvency II, is a major factor shaping investment choices; capital charges incentivize transparency and strategic asset exposures, with innovative approaches like isolating equity alpha or barbell credit strategies gaining traction. CLO investments, despite strong credit protection and historical resilience, face regulatory hurdles that limit their appeal under Solvency II, prompting some funds to exit though not all investors are deterred.

Institutional investors, including Nordic pension funds, are increasingly turning to active management and hedge fund strategies in search of higher risk-adjusted returns, while balancing liquidity needs. Amidst shifting asset allocations and regulatory pressures, firms like Ilmarinen pursue greater diversification and geographical reach, including more localized presence in key markets like China. Governance changes and political influence remain present in some pension organizations, notably Keva in Finland, which has continued appointing politically affiliated CEOs despite pledges of meritocratic leadership. Across asset managers, there is a pressing need to better serve clients, streamline offerings, and adapt to disruptive forces—goals reflected in firm-specific strategic changes and heightened client-centric initiatives. Overall, the Nordic fund and pension sector is actively confronting regulatory, market, and governance complexities while striving to align investment strategies with evolving economic realities and stakeholder expectations.

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Table of content

Uncertain way forward after AP fund reform fiasco

Political deadlock in Sweden has stalled reforming AP funds’ investment rules, limiting liberalisation efforts despite agreement on necessity. Finland shows creative but risky reinterpretations of investment restrictions. Norwegian funds cautiously lift exposure to alternatives, while Danish pension fund ATP boasts strong returns partly due to diversification in private equity, real estate, and infrastructure. The political impasse and regulatory limitations highlight challenges for Nordic pension funds in alternative investments.

ATP’s CEO on eye-opening new strategy

ATP adopts a risk-factor based portfolio strategy to better understand diversification, decomposing investments into equity, interest rate, inflation, and other risks. After surprising returns, ATP values precise risk exposures and has increased illiquid direct investments for better control. Caution about domestic equity returns leads to reallocations to secure returns, underscoring the importance of risk management and portfolio transparency in pension investing.

Varma and Ilmarinen – property flows under scrutiny

Finland’s pension funds Varma and Ilmarinen actively rebalance real estate portfolios by selling domestic assets and increasing foreign investments for global diversification. Despite high price tags and crowded markets abroad, firms aim for steady yield and strategic alignment with growth centers, especially Helsinki. The moves consider rental vacancies and economic recession impacts, while foreign buyers see value in Finnish real estate as a yield provider.

Carbon footprints and board member voting at 2016’s AGMs

Climate change, carbon footprint disclosure, and voting on board members individually rank high on agendas at Swedish annual general meetings. Investors emphasize sustainability transparency, tax disclosure, balanced incentives, and increased female board representation. Corporate governance focuses on risk management and mitigating cultural failings seen in past scandals, with stakeholders raising concerns on finance sector accountability and management practices.

A Nordic glance on carbon footprinting

Sweden leads Nordic efforts on measuring and disclosing investment portfolio carbon footprints, with potential government regulation driving progress. Other Nordic countries show varying engagement, with Norway focusing on coal divestment and Denmark facing standardisation and industry participation challenges. Finland responds quietly to NGO challenges. Nordic entities advocate global standardisation and interconnected corporate adoption for widespread carbon footprint transparency.

Interview with Ilmarinen’s CIO Mikko Mursula: industry disruption and Chinese equities

Mikko Mursula discusses adapting to a low-return environment by reallocating from fixed income to equities and real assets, expressing caution on China’s equity market due to volatility and limited development. Emphasizes Chinese consumer influence on global investments and the value of having staff localized in Asia for increased market insight. Predicts asset management industry consolidation from regulatory burdens and competitive pressures.

The quest of standardising RFPs

Due diligence questionnaire (RFP) standardisation initiative by APFI aims to streamline data requests for managers and investors, improving efficiency and comparability. While welcomed by many, challenges include customisation needs, length, and existing proprietary tools. Nordic region’s sophisticated selection community leads project. Future steps involve draft releases, global discussions, and potential online platforms for centralised data access to encourage widespread adoption.

PP Pension turns to hedge funds and active management

PP Pension increases emphasis on alpha generation by doubling hedge fund allocation and shifting to active equity management, avoiding additional credit risk. While Danish pension fund mergers remain rare, PP Pension leverages its smaller size for agility and diversified illiquid investments. Past hedge fund setbacks led to greater in-house selection responsibility. The fund seeks liquid hedge fund exposure and positively cash-flowing investments, cautiously diversifying to maintain steady returns amid market uncertainty.

Finland’s VER overcomes alternative investment restrictions

Finnish state pension fund VER achieves more liberal interpretation of investment rules, reclassifying assets to increase alternatives exposure without formal limit changes. CEO Timo Viherkenttä highlights strategic reflections on balancing long-term investor status with realistic return targets above nominal state debt costs. Portfolio diversification employs numerous small fund investments to balance flexibility and risk control. VER positions itself to capitalise on market volatility while reassessing investment principles under regulatory frameworks.

How to invest smarter under Solvency II

Institutional investors affected by Solvency II navigate regulatory capital constraints by seeking transparent, look-through funds and risk-efficient credit and infrastructure exposures. Hedge fund beta separation and barbell credit portfolios reduce capital charges. Short-dated private credit with swap overlays is capital efficient. Regulatory evolution, including potential government bond risk adjustments, requires investors balance compliance, costs, and return objectives amid volatility. Strategic preparation ahead of market fluctuations is advised.

CLOs – opportunities in a Solvency II unfriendly investment

CLOs face disproportionate capital charges under Solvency II, despite strong performance and inherent risk protections, limiting accessibility for regulated investors and impacting market liquidity. Investors with fewer constraints find value in AAA-rated CLO senior tranches offering resilient, attractive returns. Manager selection and transparency are critical given the assets’ complexity and regulatory scrutiny. Regulatory risk retention rules and geographic market differences further complicate investing in CLOs.

What’s next for emerging market equities?

Emerging market equity investors face challenges from China’s slowdown, commodity price declines and global uncertainty, yet valuations have become attractive. Diverging prospects exist between energy importers poised for growth and commodity exporters facing headwinds. Fund managers emphasize stock selection, quality companies, and reform potential. Investor sentiment and market volatility remain key risks, but opportunities arise for companies benefiting from consumption, reform, and stabilizing currencies and earnings.

Selector insight: Separating skill from chance in emerging markets

Manager selectors highlight difficulty distinguishing genuine skill from macro-driven performance in volatile emerging markets. Diverse manager specialization, team structure, and geographic presence influence selection, with preference for global or regionally focused strategies. Capacity constraints and ESG considerations shape allocations. Effective due diligence involves filtering noisy data, assessing team dynamics and processes, and monitoring evolving market conditions. Collaboration with managers enhances understanding and risk management.

Premature rumours about the death of LD

Following tax changes causing a significant outflow in 2015, Danish pension fund LD remains operational, having managed to retain members through communication and stable returns. LD plans to allocate to more liquid alternative assets aligned with liquidity and cash flow objectives, differing from typical illiquid pension alternatives. Despite reduced assets, the fund leverages lack of solvency constraints to explore niche alternatives and maintain stable portfolio management amid ongoing decline of legacy pension scheme.

Interview with AXA IM’s CEO Andrea Rossi: disruptive forces and neglected clients

Andrea Rossi, CEO of AXA Investment Managers, stresses listening to clients and simplifying brand identity amid increasing regulatory and fee pressures. Diverse European heritage informs leadership style valuing calm analysis and passion. Rossi prioritizes diversified product offerings and active management, with global growth focus. He sees industry disruption from technology and evolving ownership structures, underlining importance of client-centricity and ESG integration. Navigating regulatory complexity remains a business challenge.

People moves and governance updates in the Nordic asset management industry

Nordea and Danske Capital experience manager selector departures amid internal reshuffles. Keva appoints a new CEO with political party affiliation despite prior assurances of impartial recruitment. Norges Bank Investment Management appoints new real estate CIO. Danica and Alecta announce executive changes. Nordic regulators gain leadership roles in European bodies. These moves reflect continued dynamism and political influences within the Nordic pension and asset management sector.