Safest Returns Losing Allure for Danish Investors
Denmark’s institutional investors are losing interest in local assets deemed safe from Europe’s debt crisis and instead tapping higher-yielding markets such as infrastructure in an effort to improve returns.
Denmark’s fourth-biggest commercial pension fund, PensionDanmark, wants to raise its investment in infrastructure-related securities threefold to 18 billion kroner ($3.13 billion) by 2017, as it cuts holdings of Danish bonds and secured bank loans by 25 percent to 41.4 billion kroner, according to an e-mailed note from the investor.
“The challenge for any pension fund is that traditional bonds now deliver negative real interest rates,” PensionDanmark Chief Executive Officer Torben Moeger Pedersen said in an interview. “In terms of reducing risk, Danish and German government bonds are still to some extent useful, but in terms of generating a satisfactory return, these bonds are less relevant.”
Danish two-year benchmark debt offers negative yields, while the nation’s 10-year notes yield about 17 basis points less than similar-maturity German bunds. As Europe’s sovereign bond markets split in two according to how sustainable a government’s finances are perceived to be, debt investors face either negligible returns or the threat of losses. The extreme scenarios are reducing the overall appeal of bonds, Moeger Pedersen said.
“In the past 25 years, being a bond investor has been amazing,” he said. “But the chances of gaining more are slim.”
Part of the problem is that the potential for further monetary easing has been exhausted, Moeger Pedersen said. The European Central Bank this month kept its benchmark refinancing rate at a record-low 0.75 percent while the U.S. Federal Reserve has promised to keep its main rate at close to zero through the middle of 2015.
In Denmark, central bank Governor Nils Bernstein in July cut the benchmark lending rate to a record-low 0.2 percent, and brought the deposit rate down to an unprecedented minus 0.2 percent. Bernstein said the move was necessary after a capital influx threatened to strengthen the krone beyond the limits of its peg to the euro.
“There is very little room for more rate cuts,” Moeger Pedersen said.
According to Sydbank A/S Chief Economist Jacob Graven, the Danish central bank’s negative rates have been so successful in countering capital inflows that the bank may soon need to raise interest rates.
“The central bank is without doubt ready to purchase kroner to support the currency and avoid a hefty weakening,” Graven said in a note today. Though the central bank already bought 600 million kroner to support the currency in September, “the most recent krone weakening signals more and more that the bank will soon raise interest rates,” he said.
The krone traded as weak as 7.4576 to the euro yesterday, and was at 7.4571 as of 9:31 a.m. local time.
Investors escaping Europe’s crisis had snapped up assets from Denmark, where government debt is less than half the euro-zone average and the economy is backed by a current account surplus.
The yield on Denmark’s 3 percent benchmark note due November 2021 was little changed as of 9:31 a.m. in Copenhagen at 1.277 percent, compared with 1.468 percent on Germany’s 1.5 percent bonds due September 2022. Denmark’s two-year note yielded minus 0.039 percent, compared with a positive yield of 0.037 percent on similar-maturity debt out of Germany.
PensionDanmark, which manages 9 percent of Danish pension savings, said this week it agreed to purchase 50 percent of three U.S. wind farms from Germany’s biggest utility EON AG for “several hundred million dollars.”
PensionDanmark, which manages $22.5 billion in funds, said it plans to invest a further $2 billion in infrastructure assets over five years to generate better returns for its savers. In 2011, the fund bought a 30 percent stake in the Anholt wind farm owned by Danish oil and natural gas company Dong Energy A/S for $680 million. The fund also holds a stake in Dong’s offshore Nysted park.
PensionDanmark isn’t the only Nordic investor turning its back on domestic bond markets. Nordea Bank AB, Scandinavia’s biggest lender, said this month it finds the region’s haven assets overpriced and is advising clients against investing in local debt markets.
Nordea, which has $259 billion in assets under management, is telling private banking and pension clients to favor bonds outside northern Europe for the first time since 2008, Henrik Drusebjerg, Nordea senior strategist in Copenhagen, said in an interview published Oct. 1. Instead, the bank favors debt from Brazil, Russia, India and China as well as Mexico, he said.
Denmark’s biggest commercial pension fund, PFA Pension A/S, said in July it was shifting its search for yield outside its local market as Denmark’s AAA rated securities become too expensive. PFA, which manages about $55 billion, is stepping up its holdings of corporate bonds after the securities generated a return of 13 percent in the first six months of 2012, Chief Investment Officer Jesper Langmack said at the time.
PensionDanmark’s Moeger Pedersen said his fund’s decision to purchase more infrastructure securities will give it access to returns of about 6 percent to 8 percent. The returns are appealing because they beat debt yields and are more stable than equities, he said.
“The return is very similar to what we can get on listed equities, while with a very limited downside risk,” he said.
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