Unmeasured opportunities for emerging alpha
“PensionDanmark continues with more alpha-generating local emerging market debt exposure, reaping amazing alpha returns,” judge’s comment
WINNER
Country |
Denmark |
Founded |
1992 |
Type |
Defined contribution |
Members |
416,800 (active) |
AUM |
€44m |
Performance |
8% (1yr) |
PensionDanmark's primary objective is to build a well-diversified portfolio with an attractive risk return profile and good downside protection. It combines traditional investments in public markets with less traditional private market investing to diversify risk and harvest illiquidity and developer premiums.
Emerging market debt has been a very successful venture for PensionDanmark. Believing that a longer-term perspective was needed to generate alpha, it pursued a low-tracking error internally managed strategy in the flagship traditional hard currency asset class. The strategy emphasises diversification - currently across 83 countries - and many smaller relative positions, rather than outsized single bets.
For many years, PensionDanmark has had an exclusion list of countries, focusing largely on systematic violations of human rights, in which it does not invest. It is reviewed annually and constructed in close cooperation between the fund’s ESG professionals and portfolio managers on the asset class, which ensures that as many aspects as possible are included in the analysis.
In recent years, PensionDanmark has developed its portfolio of local currency emerging market debt along the same lines as the hard currency asset class. Opportunities are slightly harder to find, as markets are often dominated by local players and harder to access. It requires much skill, time and effort but PensionDanmark has been emboldened by recent results.
The fund has broadened its exposure to bonds that are not part of any benchmarks, including asset-backed securities based on emerging market infrastructure and capital instruments from multilateral lenders. It participated in the initial issue of a pioneering capital instrument issued by the African Development Bank providing additional equity for its balance sheet, while enhancing its ability to increase regional lending. PensionDanmark believes these instruments provide good risk-adjusted returns and that its ability to evaluate them results from its history of managing more traditional emerging market debt inhouse.
STRATEGIC TAKEAWAYS
➤ Small gains across many diversified hard currency positions preferred to outsized single bets |
➤ Portfolio of local currency emerging market debt |
➤ Non-benchmarked exposure to bonds from multilateral lenders |
HIGHLY COMMENDED
Country |
Austria |
AUM |
€5,848m |
Performance |
7.90% (1yr); |
APK Pensionskasse recently reduced allocations to traditional emerging markets, increasing exposure to global large cap companies. Conversely, small cap companies are more tied to their local markets, so APK capitalises on the faster growth of emerging markets relative to developed economies by increasing its allocation to small caps. This has paid off: emerging market small caps outperformed US small caps by 8.25% over the past three years.
Country |
Spain |
AUM |
€168m |
Performance |
8% (1yr); |
Over the past nine years, BBVA Pensiones has strategically increased the weight of emerging markets in its portfolio from 2% to 15% of equity exposure. This increase allowed it to further diversify geographically, focusing particularly on Asia. BBVA also boosted its emerging market fixed income allocation from 3% to 7%, in both local and hard currencies. Investments in frontier markets fixed income have enjoyed 20% higher yields over the past three years.
Judged by
Manfred Kupka
Petri Kuusisto
Josef Pilger
Gertrude Pils
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