From public to private
“A very convincing concept of hedging interest and inflation risk… A strategic, common-sense strategy that adapts as market conditions change. Difficult to replicate but very powerful.” judge’s comment
WINNER
● Industriens Pension’s innovative approach to fixed income investments has shielded the Danish fund from significant losses through challenging market conditions. Amid rising interest rates, high inflation and geopolitical unrest, the institution strategically employed a unique inflation hedge for its nominal bond portfolio, yielding strong relative results.
● The pension fund lost 6.5% in the calendar year 2022, but posted a 16.8% gain in 2021. Between 2013 and 2022, Industriens Pension has averaged a 6.5% annual return. This has helped the fund reach more than €29bn in assets, managed on behalf of 439,000 members.
● Fixed income is a substantial component of Industriens Pension’s portfolio, comprising more than DKK84bn (€11bn) or 38% of the total assets. Its fixed income portfolio includes nominal bonds, investment grade bonds, high yield bonds, emerging markets bonds and private credit. These exposures are actively managed by Industriens’ internal team and in partnership with third-party managers for some mandates.
● The inflation hedge is integrated into the entire fixed income portfolio and serves as protection for the nominal bond holdings. Using derivatives, Industriens Pension can profit from the hedge during periods of rising interest rates, mitigating losses. The strategy has proven successful, generating significant profits in each of the past three years.
● The institution’s focus on the private credit market further contributed to recent strong returns. Industriens Pension strategically reduced exposure to fixed-rate bonds in the listed credit market while increasing investment in the private debt market, with an emphasis on direct loans and distressed credit. This shift led to a positive return of 2% in 2022 from the fixed income portfolio.
● Between 1 January 2022 and 30 September 2023, Industriens’ investment return amounted to a 0.6% loss. However, this contrasted starkly with the 12.6% loss experienced by its fixed income benchmark – an outperformance of 12 percentage points.
STRATEGIC TAKEAWAYS
➤ Innovative new approach to fixed income delivered significant outperformance |
➤ Use of derivatives hedge against rising interest rates to generate returns |
➤ Substantial investment in private debt at expense of listed securities |
HIGHLY COMMENDED
The UK’s Pension Protection Fund (PPF) combines internal and external mandates, using in-house expertise for bespoke mandates where risk management is crucial. The liability hedging strategy involves a mix of traditional liability-driven investment (LDI) assets and a unique approach to LDI hedging, managing exposure to interest rates and inflation dynamically. The PPF’s dynamic management of its LDI strategy proved resilient during the LDI crisis in 2022, resulting in an enhanced portfolio. In the PPF’s return-seeking portfolio, a nimble approach was adopted in response to changing market conditions, adding a short-dated UK investment grade credit strategy in 2022. This allowed the fund to benefit from a buying opportunity in this asset class amid the LDI crisis, as well as providing much-needed liquidity to the market.
Judged by
Georg Inderst
Stefan Lundbergh
Michel Piermay
Christian Winder
Sponsored by
