By Hamlin Lovell, NordicInvestor

Alternatives and ESG prioritized

Over 90% of liquid asset classes have lost money in 2018 (as of mid December) – the opposite of 2017. There has hardly been anywhere to hide and generate positive returns, but allocators with a longer-term view have been putting money to work, increasing alternatives allocations – and updating their ESG policies.

2018 was a tough year for conventional investing, with most global equity markets down and many parts of the credit markets also showing negative returns. In many cases, funds denominated in EUR, DKK, SEK or NOK have only produced positive performance because these currencies weakened against the USD, and some funds have not hedged their USD exposure. Taking a constructive view on the US Dollar was a happy accident for some investors, and one of the best asset allocation decisions of the year for others.

The incentives to leave USD exposures unhedged clearly grew over the year, as the interest rate difference has now reached around 3% versus EUR, SEK or SKK and is still near 2% against NOK.

Low interest rates are one reason for continuing pressure on fees in asset management, which also contributes to the growth of passive, index investing and exchange traded funds (ETFs). A survey from Create Research found that the majority of pension funds plan to increase their passive allocations. This need not come at the expense of genuinely active managers however. They may simply replace so called “closet trackers” with real trackers.

And many institutional investors in the Nordics have confidence in active management. AP1’s Chief Investment Officer, Mikael Angberg, told IPE in December 2018 that AP1 believes in active management, because they believe markets are inefficient.

Some institutions are also managing money in house partly to reduce costs, but few teams in the Nordics are large enough to cover all asset classes and strategies. Denmark’s Lærernes Pension investment director, Morten Malle, told IPE that government bonds, half of the Danish mortgage bonds allocation, and two hedging portfolios, are run in house, but that other asset classes, including equities, private equity, infrastructure, real estate and forestry, are run by external managers.

Increased Alternatives

Alternatives in the Nordics are moving into the mainstream, as a new investment law for the AP pension funds lets them allocate up to 40% in alternatives, starting in 2019 compared to the previous rule of 5% in illiquid strategies, excluding real estate. Specifically, the AP funds will be able to invest directly into unlisted assets, which could include infrastructure, private equity and private debt. This perhaps invites comparisons with some of the huge pension funds in Canada, which have been doing such direct investments for many years, and bought assets such as airports.

Danish investment advisory firm Kirstein’s COO, Jan Willers, told Nordic Investor that Nordic Institutions are looking to add alternative assets, increasingly in the form of private debt, direct lending and infrastructure, as well as more traditional allocations to private equity and real estate. Andreas Weilby, COO of the Danish investment advisor and asset manager Spektrum, which spun out of Kirstein in 2017, is also keen on infrastructure, he told us this year.

Sweden’s Kapan Pensioner devotes its alternatives bucket to private equity and real assets, including real estate, infrastructure and timber, according to Michael Falck, who spoke to us earlier this year

Ville Toivakainen of Finland’s Aktia Asset Management and his team are travelling the world in search of alternative credit managers, in areas including trade finance, they told us.

In another interview with Nordic Investor, Pension Danmark’s Head of Private Debt, Kim Nielsen, confirmed the trend towards real assets, with assets including offshore wind farms that also tie in well with ESG objectives to increase the share of renewable energy.


Norges Bank’s ESG criteria often sets an example that is followed by other asset managers. The giant oil fund has been an early mover in measuring its own carbon footprint, which was reportedly around 100 million tonnes a year. Many other asset managers have a long-term goal of reporting their own greenhouse gas emissions, but not all currently have the capabilities to do so.

In 2018, Norges Bank introduced new rules setting a cap of 30% on companies’ income derived from thermal coal mining or power production, which resulted in several more companies being excluded.

PKA of Denmark has excluded 70 coal companies and 40 oil and gas companies, according to Rachel Fiksen’s IPE interview with the pension fund’s chief executive, Peter Damgaard Jensen.

Sweden’s AP7 – which, like all of the AP funds, is now legally bound to be managed in an exemplary manner in terms of responsible investment and responsible ownership – has started excluding thermal coal companies, in what appears to be a global trend towards divesting from fossil fuels.

AP7 has also allocated to strategies intended to make a positive impact, such as KBI Global Investors’ KBIGI Water strategy, a green mandate based on UN Sustainable Development Goal (SDG) number 16: clean water and sanitation.

Impact investing is also seen in SDG bonds, which PIMCO’s Head of ESG Strategies, Mike Amey, contributed an article to Nordic Investor about this year, and green bonds, which I discussed in an interview with Lyxor’s Adam Laird.

ESG can as well be applied to corporate credit in general, as explored in an article contributed by Muzinich & Co’s Tatjana Greil-Castro & Ian Horn.

ESG additionally applies to the selection of external managers: earlier this year, DNB’s Fredrik Willander explained to Nordic Investor how ESG has become a part of the due diligence process, which will examine which companies managers exclude and how they pursue active ownership. DNB itself is active in this area, having launched a Low Carbon Equity fund.

Gilles Lafleuriel of Nordea Asset Management, who Nordic Investor interviewed this year, also specifies strong ESG criteria, both for stock selection in Nordea’s Star Fund range, and for external manager selection.

As more and more managers sign up to the PRI, the ESG scrutiny of portfolios can only increase. The quality of ESG scoring and ranking methodologies is likely to improve over time as better disclosure from companies, competition between providers, and constructive feedback from investors, all contribute towards higher standards.