DIP’s assets are divided into four overall asset classes which are expected to perform differently under diverse market trends.
Each asset class has a defined strategic benchmark which indicates the desired asset allocation long-term.
DIP wants to pursue an active investment policy. Accordingly, the pension fund has decided on margins which indicate how much the portfolio can deviate from the strategic benchmark.
|ASSET GROUP||STRATEGIC BENCHMARK||MARGINS|
|24 %||-9/+26 %|
|40 %||-/+ 10 %|
|18 %||-10/+8 %|
|18 %||-10/+9 %|
DIP is financially sound which makes it possible for the pension fund to pursue an investment strategy with a high risk profile. The investment strategy is built on the basic assumption that increased risk yields higher returns in the long term to the benefit of the members. This supports the objective of generating a 4.5 % return (after tax).
THE FOUR ASSET CLASSES:
The primary risk of this asset group occurs as a result of changes in the interest rate level. DIP can take on interest rate risk through purchase of bonds as well as financial contracts.
DIP invests in both Danish as well as global bonds on the condition that it is safe bonds. This reduces the risk of heavy losses, and at the same time the portfolio contributes significantly to diversifying the total investment portfolio.
Danish bonds include primarily mortgage bonds as well as bonds issued or guaranteed by the Danish state. As DIP’s interest rate liabilities are in Danish kroner, a considerable part of the portfolio must be Danish bonds.
Foreign bonds have basically the same characteristics and are subject to the same limits as Danish bonds. For this group of bonds it is the development of the different countries’ interest rate level that dictates the movements in market prices and consequently the return.
The minimum limits for the portfolio of government bonds and mortgage bonds ensure that the portfolio always represents a considerable part of the total assets. The limits also ensure that the portfolio can serve as an important part of DIP’s cash resources. The pension fund has also decided on duration limits to ensure the right level of interest rate risk.
As mentioned, the asset group will always hold a considerable part of the investments in government bonds and mortgage bonds. However, small amounts of money can be invested in i.e. corporate bonds with a risk equaling investment grade – that is BBB or higher from the credit rating agency Standard & Poor’s.
The primary risk of this asset group occurs as a result of changes in equity prices.
Equity investments are purchase of listed and unlisted equities as well as financial contracts. Unlisted equities cover private equity and are considered as an alternative investment.
An equity investment is an ownership interest in a corporation. Equities are somewhat more risky than bonds - in return they yield higher returns in the long run. Accordingly, equities are suitable investments for a pension fund that has long-term commitments. The return on equities is paid the form of dividends and market value adjustments.
When investing in equities, focus is on market risk as well as company specific risk. Market risk relates to the macroeconomic conditions of the single regions, and it can be reduced by spreading the investments geographically and to several sectors. The company specific risk is reduced by limiting investment in one single company.
The primary risk of this asset group relates to borrower's ability to honour his debt. In the market this is reflected by the current trends in credit spreads.
When investing in credit bonds, DIP is paid by way of an excess return for taking on the credit risk. The investments contribute to improving the risk-return relationship of the total portfolio as the fluctuations in market prices typically are different from equities and other bonds.
A bond/loan of this asset group must be issued by an emerging market country or a company/state with a risk equaling non-investment grade – that is BB or lower from the credit rating agency Standard & Poor’s.
When DIP invests in emerging market government bonds, the pension fund primarily takes on a country risk. As the economies of the different countries mature, the emerging market countries increasingly issue their bonds in local currency instead of USD and EUR. And by investing in local currency, DIP is also exposed to currency risk.
The pension fund can also invest in alternative credit to benefit from other types of risk premiums on the liquid credit market.
The primary risk of this asset group occurs as a result of changes in the real interest rate/inflation.
DIP can invest in real assets in the form of liquid index-linked bonds as well as other real assets.
Liquid index-linked bonds
Index-linked bonds have contrary to nominal bonds no inflation risk. Both the payment and unpaid debts are continually adjusted for inflation which ensures the purchasing power of the bond’s future payments.
As the value of index-linked bonds contrary to the value of nominal bonds is not eroded by inflation, they contribute to spreading the risk of the portfolio. DIP can invest in index-linked bonds by way of Danish and global bonds with high credit quality.
Illiquid real assets
The investments in illiquid real assets are very diverse. A common feature of the assets is, however, that they are expected to have a considerable exposure to inflation in the longer run, and accordingly return and risk primarily occur as a result of changes in the real interest rate/inflation.
Examples of investments are real estate as well as alternative investments in i.e. forestry and infrastructure.