Since joining the NKr 7.2bn (€819m) Akershus fylkeskommunale pensjonskasse, the Akershus county council pension fund, three years ago, chief investment officer Paal Nordhagen has shifted the investment portfolio from a more conventional balance to its current, alternatives-focused, seven-asset class model.

Inspired by US investor funds, the fund would ideally like to achieve an equal distribution between the different classes – stocks, bonds, property, commodities, infrastructure, private equity and hedge funds – to around 14 per cent each.

“When you consider that around four of those classes can be deemed alternative, then that totals roughly 60 per cent of the allocation. However, we are limited to 7 per cent,” says Mr Nordhagen, “and that’s my problem.” He would prefer to see the limit on alternatives increased to 60 or even 70 per cent.

“Last year, our alternative investments were the only four asset classes that were positive, returning 3.4 per cent,” says chief executive officer Jan Frode Jakobsen.

Investments in commodities performed especially well, largely because they were dollar-denominated – the dollar strengthening 40 per cent compared with the Norwegian Krona over the last four months.

Like many of his counterparts, Mr Nordhagen would like to see Norwegian investment regulations relaxed.

“Our ideal strategy would be to spread investment evenly across different, uncorrelated asset classes,” he says, “and I believe our view is representative of other pension funds as well.”

The government has been looking into the problem and has considered lifting restrictions on hedge funds. Were it to become possible to sell these on the Norwegian market, it would mean that they would no longer be classified as alternatives. It has also completely removed the 35 per cent limit on equity.

The latter resulted from reforms in January 2008 that also upped the limits on alternatives from 5 per cent to 7 per cent. However, many feel this did not go nearly far enough.

“We have been waiting for at least a year,” says a visibly exasperated Mr Nordhagen. “The lawmakers have made proposals, but so far nothing has been signed into law.”

For now, a pension fund like Akershus, which aims to limit volatility through diversifying its alternative investments, has had to get creative. Through the use of indexed bonds and exchange traded funds (ETFs), Mr Nordhagen has pushed the limits of the regulation.

“If we buy an ETF – classified as a stock – this gives us exposure to, for example, commodities, without using up our 7 per cent limit on alternatives,” he says.

Akershus pension fund is Norway’s largest county council fund and returned -14.8 per cent in 2008, closing with a solvency ratio of 188 per cent. By the end of May this year, the fund had recovered to return 5.7 per cent.

Mr Jakobsen attributes its high stock allocation as the main culprit, though it has not caused the fund to adjust its strategy.

Nonetheless, the crisis caused the fund to have to access its reserves and even prepare for the eventuality of submitting a recovery plan.

“We almost reached bottom, but didn’t have to call on our sponsors,” says a clearly relieved Mr Jakobsen.

Around 75 per cent of the fund’s membership is drawn from hospital employees, with the remainder being Akershus county council employees. It means that the fund needs to take particular care with its strategy as hospitals are already underfunded, and getting the sponsor to top up the fund would therefore not be easy.

Mr Jakobsen credits the board with maintaining the fund’s strategy through what was a trying period. He cites the importance of having the required buffer capital, a solid capital ratio, and their steadfastness in maintaining the strategy. “That’s extremely tough, but our board managed it and we have now hopefully weathered the storm and come out the other side,” he says. “When the markets go up again, we will follow.”

Though the vast majority of the fund is still invested in Norwegian bonds, Mr Nordhagen is increasingly looking to emerging markets and green investments like windmills, waste-resource management, timber and its global stock mandate, which invests in the 100 most socially responsible investment (SRI) friendly companies in Europe.

According to its most recent monthly report, direct SRI mandates account for 4.6 per cent the funds. Rather than employing strict SRI targets, something it is felt would prove too restrictive for a fund of its size, the pension fund is simply committed to increasing the SRI participation of the portfolio each year.

“We consider 80.5 per cent of our investments as not in conflict with SRI,” says Mr Nordhagen. “That does not mean that the remainder is in conflict; it only means that we can’t control whether it is SRI or not.”

Obtaining transparency for investments in private equity funds of funds or emerging markets, for example, remains difficult. “We lack the resources to assess that month to month and therefore cannot strictly define it as SRI compliant,” he says.

With no planned changes in strategy this year, the fund may turn its attention to expanding in size. It says it is aware of a number of enterprises that could benefit from co-operation with the fund. Even though such structural changes may be part of the foreseeable future, Mr. Nordhagen states that this would be too speculative to comment on at this stage.

Asset allocation

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