Danish labour-market pension fund Sampension has revealed it is building up a portfolio that will seek to benefit from higher inflation in Europe, even though the European Central Bank (ECB) is still engaged in action partly to ward off the perceived risk of deflation.

The DKK250bn (€25.8bn) pension fund said it took the view that the current level of interest rates in Europe was unjustified.

Henrik Olejasz Larsen, investment director at Sampension, told IPE: “We are building up and slightly adding to a portfolio that will benefit from high inflation in Europe.”

He said the pension fund was buying European inflation-linked bonds and inflation swaps, adding that the deals were being done directly rather than through a manager.

He acknowledged such buying was against the grain of most institutional investment behaviour at this point in the cycle, but he said Sampension saw the action as protection against rising nominal interest rates in Europe, which had been falling.

“We do not really think the current level of interest rates in Europe is justified,” Olejasz Larsen said.

“We are very conservative in our allocation towards traditional nominal duration risk and have instead picked up some protection against rising inflation.”

Inflation is unlikely to rise in 2016, however, and probably not even in 2017, he said.

“This is a more long-term view, which we hope will also be reflected in the prices of these instruments.”

Olejasz Larsen said Sampension aimed to achieve a higher return by getting the inflation protection at a time when it was cheap.

He said there were now a number of factors that pointed towards rising inflation coming through at some point in the future, though it could not be expected to be seen in official indicators for at least the next two years.

In the US, there is a pick-up in consumer demand, while in Northern Europe wage increases are likely to grow, he said, adding that even though there is still slack in the economy and labour markets in parts of Southern Europe, that slack has been reduced.

Olejasz Larsen went on to give other reasons why Sampension was acting early with these investment moves.

“One of the reasons is we are very aware of our obligation to deliver not only high nominal pensions but also pensions with a satisfactory purchasing power to our members,” he said. 

“The second thing is we are building up a portfolio especially tailored to protect against the inflation risk that Danish municipalities have because they have salary-linked pensions.

“So, in that case, it is not just ambition – they have this obligation, and we are building up the portfolio to hedge that obligation.”

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