EUROPE - Nordic pension funds increasingly expect to outsource the management of alternative investments to third parties but some local investments may move more in-house, according to a study conducted by Kirstein Finansrådgivning.

A survey of pension funds in Denmark, Finland, Iceland, Norway and Sweden revealed a proportion of investments in real estate, hedge funds, private equity and infrastructure is expected to be outsourced over the coming months because they are more complicated to manage, while there is a higher chance investments in local equities and fixed income may be managed internally by pension fund teams.

More specifically, it is expected pension funds that currently outsource the least - between 0% - 50% - of their private equity and hedge fund investments do all expect increased outsourcing within these asset classes.

Half of the investors who outsource between 0%- 50% of their real estate investments also expect to increase their outsourcing while investors who already outsource most of their alternative investments expect little change.

Interestingly, international equities could see increased outsourcing by two-thirds of pension funds, where the outsourced amount is between 0% and 50% of their total allocation to that strategy.

That said, 12% of investors also said they are likely to bring its investments in-house where they already outsource up to 50% of their assets in local fixed income and 4% of investors who already outsource most of their local fixed income investments expect to decrease their outsourcing.

Evidence from the Nordic Investor Survey 2007 suggests the percentage of local equity and fixed income outsourced to third parties has already dropped among Nordic pension funds compared with 2006.

Danish pension funds are more likely to outsource the management of their local equity investments compared with less than 40% of Finnish and Icelandic funds.

That said, the extent of outsourcing depends on the nature of international bond investments, according to Kirstein, so investment grade bonds are more likely to be managed internally while high yield bonds and emerging markets debt are frequently outsourced.

But Kirstein also suggested while the decision to manage assets internally or externally is likely to be determined by the size of assets they manage and the team's skill base, the financial environment they operate under could also affect whether it is better to hand assets to external providers.

"The attitude to outsourcing may also be influenced by capacity limitation of the best asset managers which may increase the interest in establishing internal management. This is the situation, for example, in the case of local equity management," said Kirstein.

"To this should be added that the very clear preference for hidden costs may occasion companies that are subject to intense external focus on costs to opt for internal management because it makes it easier to hide the costs. In countries where the management is wrapped in funds, this may, however, have the opposite effect."

Findings suggest while "there is no clear correlation between the investor's size and the outsourcing percentage", the largest investors have the lowest outsourcing percentage except in relation to real estate.

Sweden is still found to be the country which outsourced the least, while 100% of respondents from Iceland said they would consider outsourcing their asset management to some degree despite the continued consolidation of pension funds.

To find out more and obtain a copy of the Kirstein Nordic Investor Survey 2007, priced €7,500, visit visit www.kirsteinfinans.dk or contact financial analyst Jan Willers by telephone on + 45 33 18 99 55 or via email at jan@kirsteinfinans.dk.

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