Issue 3, 2017


Nordic institutional investors are navigating a complex landscape marked by trends such as fluctuating insourcing practices, increased scrutiny on executive pay, and rising regulatory attention on alternative investments. While insourcing aimed at cost reduction and control has been prevalent, concerns about political volatility and portfolio complexity are prompting some players, like Sweden’s KK-Stiftelsen, to switch back to external management. Additionally, Nordic regulators, especially in Sweden and Denmark, are intensifying monitoring and assessment of alternative asset risks, with an emphasis on ensuring appropriate investor expertise and management processes.

Investor attitudes towards active management remain nuanced amid a competitive market landscape influenced by fee pressures and the growth of passive investing. Nordic funds like Industriens Pension maintain confidence in active strategies, emphasizing the value of close manager engagement and the allocation to alternatives despite higher associated costs. Meanwhile, currency hedging emerges as a critical yet intricate consideration in portfolio risk management, with strategies varying widely among Nordic investors depending on factors like base currency, interest rates, and risk tolerance. Dynamic and tailored currency hedging approaches, such as those at Denmark’s PBU, exemplify efforts to optimize risk-adjusted returns.

Insights from industry leaders at forums and roundtables underscore the importance of real assets for portfolio diversification and inflation hedging, even as valuation challenges and rapid technological disruptions raise concerns about future asset viability. Institutional investors exhibit caution towards infrastructure and private debt investments but recognize their potential when paired with sufficient resources and expertise. Furthermore, evolving regulatory frameworks and shifting investor expectations are compelling asset managers to innovate in client engagement and product offerings, aligning solutions more closely with investors’ long-term objectives and ethical considerations.

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Table of content

Insourcing versus outsourcing among Nordic institutional investors

The insourcing trend at Nordic institutional investors has plateaued due to political risk, market complexity, low interest rates, and uncertain equity outlook. Some, like Swedish foundation KK-Stiftelsen, are shifting to external managers to handle all assets, emphasizing growing complexity and need for external expertise. Surveys indicate enthusiasm for in-house management has waned, with some investors increasing external management.

Nordic regulators increasing oversight on alternative investments

Danish and Swedish financial regulators have intensified monitoring of alternative investments amid concerns about investors’ knowledge and risk management. Swedish regulator Finansinspektionen is mapping institutional alternative investments and related risks for the first time; Denmark is increasing supervisory bandwidth following political attention on pension fund exposures.

Executive pay as a consideration in manager selection

Despite increasing shareholder scrutiny on asset manager executive pay, Nordic institutional investors largely do not make remuneration practices a deal breaker in manager selection. They emphasize shareholder policies promoting reasonable compensation but acknowledge emerging attention to excessive pay and its alignment with long-term investor interests.

Challenges in finding uncorrelated hedge fund strategies

Denmark’s Realdania struggles to identify truly uncorrelated hedge fund strategies for its alternatives portfolio revamp. Many funds claiming uncorrelation underperform during market stress or have unproven track records, complicating diversification goals. Realdania continues exploring areas such as reinsurance and special situations, cautious about investability and track record authenticity.

Swedish clampdown on misleading fund names

The Swedish Consumer Agency is expanding banned fund names to prevent misleading investor impressions, including words like “safe” and potentially “absolute return.” Many fund managers and insurance companies are changing fund names to comply. Regulatory tension exists between the Consumer Agency and the Swedish FSA regarding fund name approvals.

Institutional investor perspectives on real assets investment

Nordic investors discuss real assets strategies focusing on diversification, inflation protection, and long-term cash flows. Concerns include rising prices, disruption risks, political volatility, and illiquidity. Investors express divergent views on infrastructure and real estate, noting the importance of internal resources, strategic asset allocation, and due diligence amid a crowded market.

Currency hedging: approaches and challenges

Currency hedging decisions are complex, given currencies lack expected returns and can behave unpredictably relative to assets. Hedge ratios vary widely among Nordic investors, influenced by factors such as base currency, asset allocation, interest rate cycles, risk appetite, and regulatory frameworks like Solvency II. Dynamic approaches to hedging, incorporating macro views, are gaining traction.

Investor focus: dynamic allocation and risk management

Norwegian Gjensidige prioritizes managing drawdowns and maintaining portfolio stability to protect insurance liabilities. It employs dynamic tactical asset allocation and remains cautious on newer asset classes like infrastructure due to organizational capabilities and fee considerations. The insurer favors diversification and active risk management in a low interest rate environment.

Industriens Pension on active management and client engagement

Denmark’s Industriens Pension maintains a preference for active management, accepting higher investment costs justified by performance. It emphasizes close, continuous engagement with external managers and allocates substantial resources for travel and meetings to foster understanding and influence, distinguishing itself from peers with less active oversight.

J.P. Morgan Investment Management on industry evolution and client needs

J.P. Morgan’s EMEA head Mike O’Brien describes unprecedented challenges from low bond yields, changing demographics, and regulatory pressures. He highlights a shift toward outcome-focused solutions over traditional building-block investing, increased industry consolidation, margin pressure, and greater emphasis on fiduciary responsibility within the MiFID II framework.

Corporate hospitality in asset management

Client entertainment remains important for relationship building despite regulatory restrictions and industry pressure to limit expenses. Nordic asset managers have transitioned to modest, targeted hospitality typically involving lunches rather than lavish events. Informal settings foster trust and ease communication, but compliance and cost sensitivity can constrain typical practices.

Book recommendations from investors

Ulrik Dan Weuder, head of global direct investments at Denmark’s ATP, favors books challenging conventional thinking and offering deep historical analysis. His recent reads include works on human societal collapse, the American independence period, society successes and failures, and “The Prince” by Machiavelli, emphasizing realism and long-term perspectives.

Personal profile: Timo Viherkenttä, State Pension Fund of Finland

Timo Viherkenttä, CEO of Finland’s State Pension Fund (VER), shares insights on his career, daily routines, and reading interests. He emphasizes long-term thinking, art appreciation, and realistic economic expectations, highlighting his leadership commitment to balancing pension expenditures in a low-return environment.