PenSam’s strategic asset allocation (SAA) is rooted in a simulation-based modelling of all the asset classes in its portfolio. It believes that alternatives, such as real estate, private debt and infrastructure, earn an illiquidity / complexity premium compared with listed assets, while others, especially low-risk illiquid credit, have a higher return to risk ratio than other investments.

PenSam runs the pensions assets for eight pension funds. Only one, Fleksion, is currently open and active in that it continues to receive contributions. Fleksion is therefore very much a driving force in PenSam’s investment strategy and how it constructs its portfolio.

Based on a return target set for Fleksion, PenSam undertakes specific investment modelling that is designed to lead to an optimal portfolio that differs depending on whether leverage is considered. When it does allow for leverage, the optimal portfolio has a higher allocation to low-risk illiquid credit. Thus, it is possible to achieve a higher long-term expected return without increasing the risk as measured in worst-case scenarios. It also shows risk would increase if the same expected return target was achieved by buying equities and selling bonds.

For the closed seven pension funds, which PenSam calls ‘run-off’ portfolios, PenSam has a substantial allocation to AAA-rated Danish government bonds thanks to their low-risk capacity. These portfolios are constructed to be very liquid to allow as much as half to be converted into cash in a matter of days. Although this liquidity is not necessary, it increases the seven funds’ solvency risk capacity to invest in assets such as low-risk illiquid credit.

The strategies are linked: By creating an internal loan structure that provides leverage to Fleksion, PenSam can increase the expected return in all the portfolios without increasing the economic risk. The internal loan is a collateralised repo structure between the run-off portfolios and Fleksion.