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A $120 Billion Danish Pension Manager Loses Faith in Bonds

Frances Schwartzkopff
·2-min read

(Bloomberg) -- In one of the world’s best-run pension markets, the biggest commercial manager says it’s time to dump bonds.

“The switch out of fixed income into broader equities, whether it’s listed or unlisted, is what we recommend and what we are positioned for,” Kasper Lorenzen, chief investment officer at Copenhagen-based PFA, said in an interview.

Back when most asset managers were being taught the trade, “we learned that government bonds are the safe assets, the risk-free asset,” he said. “Well, let’s see in a year or two what is really the risk-free asset. That transformation is definitely going on.”

The $120 billion pensions manager points to the flood of issuance to finance pandemic relief packages as a key reason why bonds are losing their allure. Mass issuance has also upended the in-tandem moves in stocks and bonds that had dominated markets after the last financial crisis. What’s more, it’s now clear that central banks are content to let the long end of the yield curve move considerably higher.

“I’m just surprised how quickly things have changed,” Lorenzen said. “I would have thought that inflation-rate expectations and also interest rates would have been a little bit more anchored.”

PFA, like many others, lost money on its bond portfolio last quarter. Its fixed-income investments generated a negative return of 1.9%, while listed equities delivered a positive return of 5.6%. Alternative assets added 1.6%.

“In hindsight, we should have had even more exposure” to stocks, Lorenzen said. “At PFA we have a preference for stability and quality in our equity portfolio when it comes to tilts. We adjusted that in the fourth quarter to be a bit more aggressive on equities, simply because if you believe that equity risk is going to be compensated, you can’t be too defensive in your style tilt.”

Denmark boasts the world’s best-managed pensions market, together with the Netherlands, according to the Mercer CFA Institute Global Pension Index. Funds in the Nordic country were among the first in the world to respond to ultra-low interest rates by delving into alternative assets that included infrastructure and other hard-to-price, rarely traded markets.

Now, Lorenzen says pension funds need to brace for a world in which the supply of government bonds is going to be “huge.” What’s more, as investors increasingly shift into equities, risk premiums are likely to go “quite a bit lower,” he said.

But stocks are the only place to be, Lorenzen acknowledged.

“There is no real alternative,” he said.

(Updates to add 1Q returns)

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