Issue 4, 2016

The Nordic Fund Selection Journal explores key themes in Nordic institutional investing, focusing on transparency, factor investing, responsible investing, and credit strategies. The Danish pension funds, exemplified by PensionDanmark, lead the way in transparency by disclosing costs by asset class, which helps optimize investment expenses and promotes accountability. Nordic investors emphasize active engagement in corporate governance, particularly in the U.S. market, where cultural and regulatory differences require tailored proxy voting strategies. ESG integration is gaining ground in hedge funds, with institutional investors like Varma and APG exerting mounting pressure on managers to adopt climate and sustainability policies despite ongoing challenges such as regulatory burdens and lack of standardization. Factor investing remains a prominent strategy for Nordic investors seeking systematic risk exposures, although debates continue about the predictability of returns and the best methodologies for implementation.

In credit and alternatives, Nordic pension funds are increasingly allocating to leveraged loans and private infrastructure, seeking enhanced returns in a low-yield environment. Managers caution about the late credit cycle and advise focusing on capital preservation and downside risk management, while recognizing regulatory-related opportunities such as Solvency II impacts on asset allocation. Direct lending and co-investments provide diversification benefits and cost efficiencies, but the complexity and illiquidity of loans demand specialized expertise and due diligence. Leading asset owners like Industriens Pension are expanding their in-house teams to focus on private assets, including infrastructure and renewables. The Principles for Responsible Investment (PRI) is undergoing reforms to raise member accountability and highlight leaders in responsible investment, aiming to enhance impact across global signatories. Overall, Nordic investors combine rigorous transparency, responsible investment practices, and strategic allocations across asset classes to navigate the challenges of today's financial markets.

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Table of content

Industry Cost Transparency and Pension Funds

Danish pension funds have pioneered cost transparency with some funds like PensionDanmark publicly disclosing investment costs by asset class. The debate revolves around balancing low cost with strategic portfolio risk and the impact of moving capital to expensive but potentially higher yielding alternative assets.

Green Initiatives by Nordic Pension Funds

Ilmarinen’s installation of solar panels and other measures demonstrate Nordic pension funds’ increasing focus on sustainable real estate investments and ambitious carbon footprint reduction targets.

Swedish Pension Fund AP1’s New External Managers Platform

AP1 is streamlining its administration of external managers by establishing an Irish CCF platform with Mercer to reduce costs and speed operational processes, but it will not open the platform to other institutional investors.

Nordic Corporate Governance Engagement in US Markets

Nordic investors have escalated their US corporate governance efforts using shareholder resolutions and expert advisory boards to overcome structural challenges, despite slow progress and cultural differences compared to Nordic markets.

Challenges in US Corporate Governance and Proxy Access

US companies often maintain combined CEO and chair roles with advisory AGMs, limiting shareholder influence. Nordic investors advocate for proxy access reform and independent chairpersons for better board accountability.

Alternative Risk Premia as an Emerging Investment Strategy

Alternative risk premia strategies provide exposure to systematic risk factors with low correlation to traditional asset classes, offering diversification and potential returns in low yield environments.

Interview with PensionDanmark’s CEO Torben Möger Pedersen

Covers the fund’s pioneering renewable energy investments, growth of in-house capabilities in infrastructure, reaction to UK Brexit, and innovative risk-sharing investment models involving developing countries.

Mounting ESG Pressure on Hedge Funds

Institutional hedge fund investors increasingly demand ESG integration, although challenges persist from regulatory burdens, lack of standardized best practice, and small hedge fund operational infrastructures.

Simple Observation or Performance Predictor? Active Share Debate

Active share is increasingly used to differentiate true active managers from closet indexers but critics caution against overreliance on active share as a predictor of outperformance, highlighting context dependency and susceptibility to gaming.

Clearing Up Closet-indexing Claims in Denmark

Danish funds proactively disclose active share and tracking error to combat industry scrutiny and to avoid regulation, demonstrating a model for transparency though measurement limitations remain, especially in smaller markets.

Roundtable on Factor Investing in the Nordics

Discussion covering definitions of smart beta, risk premia and factor investing, strategic versus tactical allocation, and challenges including crowding, costs, product complexity, education and diversification.

PRI’s Tougher Stance Against Members

The Principles for Responsible Investment plans to increase accountability by highlighting leading signatories and delisting laggards, while considering updating principles to address broader financial system risks and promote sustainable development goals.

Leveraged Loans at the End of a Credit Cycle

Investors weigh credit market risks as leveraged loan yields fall and leverage rises. Direct lending, regulatory-driven opportunities and differentiating from high yield bonds represent current themes, with liquidity and complexity considerations limiting broad adoption.

Investment Strategy Focus: Finding Credit Value

Sampension emphasises regulatory risk exposures, co-investments and direct commercial real estate lending to generate illiquidity and complexity premia, balancing modest return expectations with diversification and risk management.

Industriens Pension Internal Restructuring and Focus on Alternatives

Following organisational changes, CIO Jan Østergaard focuses exclusively on private investments, expanding the alternatives team and emphasising co-investments, direct infrastructure deals and renewables beyond wind.

Nordic Responsible Investment Pioneer: Ulrika Hasselgren, ISS

Profile of Ulrika Hasselgren, managing director of ISS Ethix and global head of responsible investment strategy, highlighting her background, career milestones and personal insights into responsible investing.

Contacts and Industry News

Latest career moves, appointments, and upcoming events in the Nordic asset management industry relevant for fund selectors and institutional investors.