Bond-heavy Sampension, the DKr93.5bn (€12.5bn) Danish pension management company with two-thirds of its assets invested in fixed income, is set to add more alternatives at the expense of its bond holdings. And, after pulling in returns of only 2 per cent last year, diversifying might seem like the right way forward.

Its chief investment officer, Henrik Olejasz Larsen, who has held the post for a year, is now preparing the fund’s first move into commodities and infrastructure, and also aims to increase its property, forestry and private equity holdings.

Commodities, which the fund is currently analysing, will most likely be energy-type commodities taken on via index-linked funds. Mr Larsen hopes the asset class will provide good diversification from equities.

“It is likely we will wait until later this year to do this, since we are at the end of the business cycle and commodities probably won’t perform that well for now,” says Mr Larsen, who was previously chief risk officer at Danish pension fund giant ATP.

He is also hesitant about infrastructure despite having a strong interest in the asset class. Timing for any move into the sector is yet to be determined.

“Many investors are moving quickly into the infrastructure market, so I’m concerned that could influence prices. Any investment will either be in funds or as a co-investment, but we have to look on a case-by-case basis to see if it makes commercial sense to invest,” says Mr Larsen.

So far, the fund has about 10 per cent invested in property, 2.5 per cent in private equity and 1.5 per cent in forestry. It is now increasing these holdings as well as reallocating its property portfolio from direct investments to fund holdings.

“We sold a lot of Danish property last year and are using those assets to further diversify the portfolio. We are building up our portfolio of Asian and European funds and will also probably begin to invest in the US later this year. We want to utilise the bad situation in the US property market, but don’t want to go in too early,” says Mr Larsen.

Nonetheless, last year was a disappointing one for real estate, which only returned 3.4 per cent compared to 2006’s returns of 28.9 per cent.

Its forestry investments have so far primarily been in funds investing in North America, pursued with advice from the International Woodland Company, the Danish provider of forestry investment services.

“We are now looking to diversify our investments into South America. However, woodlands will always be a fairly small part of our portfolio,” says Mr Larsen.

Its overall allocation to equities, which it mainly invests through mutual funds, will remain at some 23 per cent of assets. However, it will shift from listed to unlisted equities. Currently, 2.5 per cent is private equity, which Mr Larsen admits is not very much.

“But we have very large interest rate liabilities, so there are limits for how much interest risk we can take to maintain a decent solvency,” he says.

That has not stopped the fund from ploughing money into emerging market equities, however, which it has been overweighting for some time. One-tenth of its entire equity holdings are invested in emerging economies.

“We have an overweight position to emerging markets and will probably keep that bias going forward. Ten per cent of our stock holdings are tied up in the asset class and that had a significant impact on our performance last year,” he says.

Sampension’s hedge funds are managed by its different equity and bond teams and it is the underlying type of risk that governs who manages what. The two fixed income teams, divided between bonds with interest rate risk and bonds with credit risk, are running fixed income hedge funds and credit opportunity hedge funds respectively.

“Some of the risk from the asset class is embedded in the various hedge funds and I think you know the risk better if your daily work is involved in that asset class,” Mr Larsen says.

Sampension is also going through changes from a structural point of view, which will mean a further reduction of bonds. It has started offering non-guaranteed lifecycle pension insurance instead of traditional life annuity products and is now hoping its current members will take a leap into the new product.

“At the moment, we’re analysing how we can persuade existing clients to move into the new product,” he says.

All the scheme needs to do now is make that happen. While its new clients will automatically be enrolled in the lifecycle product, where members bear the investment risk during the savings period, the bulk of its members remain in the old system.

“We at least want to give them the option to switch. A possible incentive could be to give them some of our undistributed reserves, but we also think the new investment strategy will be more beneficial in the long run,” he says.

This would not only solve the problem of its heavy bias towards bonds, but would also lead to a dramatic change in its asset composition, since the new product has a large exposure to alternatives.

“Our old strategy puts limitations on investment risk and doesn’t reflect different risks for different ages. It has been the main reason why we have such a large exposure to fixed income,” explains Mr Larsen.

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