Historically Cheap Linkers Draw In CIO at $76 Billion PFA Fund

Denmark’s biggest commercial pension fund is clinging on to its inflation-linked bonds in case markets suddenly turn and prices surge.

“You’ve never paid less for linkers than you do now; the pricing is at historic lows,” Poul Kobberup, head of fixed-income investment at the Copenhagen-based fund, said in a phone interview. “No one knows what the market will look like half a year from now. Linkers may well prove to be the most attractive asset class out there and the best way to guard against sudden rises in rates.”

PFA wants bonds designed to hedge against inflation even amid warnings that much of the developed world is sinking into a disinflationary rut. The fund, which is also trying to build up its real estate portfolio, says it doesn’t want to risk getting caught in a bottleneck should more investors start buying inflation protection once markets turn.

“We continue to have a very traditional allocation,” Kobberup said. The fund wants linkers and real estate assets to make up as much as 20 percent of its total portfolio, he said.

Denmark’s inflation linked bond due 2023 has lost investors 0.5 percent since it was issued in May 2012. Nominal bonds with seven to 10 years left before they mature delivered their owners a 5.1 percent return over the same period, according to data compiled by Bloomberg.

Tackling Lowflation

A report last week showed Danish consumer prices fell 0.1 percent in May from a month earlier, while annual inflation was just 0.5 percent. In the euro area, inflation is less than half the European Central Bank’s target of close to, but below, 2 percent. In neighboring Sweden prices slid an annual 0.2 percent in May.

Since International Monetary Fund Managing Director Christine Lagarde in April coined the term “lowflation,” evidence of disinflation and even deflation has spread through much of the rich world. At the same time, many of the economies dealing with below-target consumer prices are witnessing record-high prices in their housing markets.

The developments prompted some of the Nordic region’s biggest investors, Denmark’s ATP Pension fund, which oversees $125 billion in assets, and PensionDanmark, which manages $28 billion, to reduce their holdings of linkers.

PFA has seen its stash of inflation-linked bonds fall, though only as a consequence of shrinking supply, Kobberup said. It lost 4.7 percent on its linker portfolio last year versus a 0.5 percent loss on its nominal krone bond holdings. The fund held 23.3 billion kroner in debt that tracks consumer prices at the end of 2013, according to its annual report. That’s a 15 percent decline from the beginning of the same year.

“We’ll always have a part of the portfolio in linkers,” Kobberup said.

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