DENMARK - The Danish industry-wide pensions provider PKA is set to boost its investment in private equity significantly in the next few years, in the wake of strong returns for the asset class in 2006.

Overall, the 2% private equity allocation of the eight PKA pension funds gave an investment return of 21.6% last year, the provider said in announcing full-year results. However, the established part of the private equity portfolio generated a return of 32.9%.

"This gives us an appetite for more, and in the next few years we will expand this asset class significantly," investment director Michael Nellemann Pedersen said.

"Building up a portfolio of private equity earlier on has proved the right thing to do. We are being rewarded for that now," he added.

"It takes time before you can see the result of such investments, but if we isolate the established private equity portfolio, we can see that it gave a return of 32.9% in the last year."

The eight funds had an average return of 6.3% before tax in 2006, down from 18.6% the year before. Stripping out the effect of liability hedging, however, the return fell to 10.4% from 13.3%. Total assets rose to just under DKK116bn (€15.6bn) from DKK107bn in 2005.

PKA was generally very satisfied with the result, which beat the benchmark, said Nellemann Pedersen. A high equity weightings, especially in Danish and private equity, and a high proportion of real estate paid off in 2006, but while hedging gave a good return the previous year, it depressed the overall investment return in 2006, PKA said.

Although PKA's hedging strategy depressed the return for bonds and the value of the funds' interest rate hedging instruments, Nellemann Pedersen defended the use of the derivatives.

The main reason for using hedging instruments is to protect the pension funds against possible falls in interest rates, he said. Hedging provides room for manoeuvre in other investments, such as equities, he said.

"Without the interest rate hedging, the PKA funds would have found it hard to maintain the high equity weightings that they now have, of around 35%," he said. Also, the interest rate hedges greatly reduced the burden on the funds in making provisions,"
the investment director added.

Topics