Banned from investing abroad for years, Icelandic pension funds are getting into gear to add hundreds of billions of local kroner to their foreign asset allocations.
Last month the Central Bank of Iceland finally gave the country’s ISK 3.6 trillion (EUR 30 billion) pensions industry the green light to invest more freely abroad, tearing up restrictions that have been in place since the aftermath of the 2008 crisis that devastated the island’s economy.
But how fast are the funds likely to switch domestic assets for foreign — and are they being flooded with offers from asset managers?
Stapi lifeyrissjodur, located in Akureyri in the north of Iceland, had around 24% of assets in foreign investments at the end of last year.
“I think most pension funds, and ours included, would like to be at around 40% at least,” says the pension fund’s CIO Arne Vagn Olsen.
Some capital controls lifted
Iceland’s parliament, Alþingi, did vote last October to lift some capital controls, freeing up capital movements by individuals and firms. But the bill did not alter things for pension funds, which have been allowed to increase their foreign investment somewhat in the last few years only through a series of allowances granted by the central bank.
By law, Iceland’s pension funds’ foreign investments are capped at 50% of total assets.
One effect of being locked in by capital controls since 2008 has been too many large investors chasing too few investment assets on the island.
“The overall reason why we need to expand our foreign investments is diversification, and the second reason is that we are simply becoming too large for the domestic Icelandic market,” Olsen says.
He predicts it will take Stapi five to ten years to reach its target allocation.
The North Atlantic Island — which finally severed ties to the Denmark Crown in 1944 after independence in 1918 — may have a population of only a third of a million, but in relation to GDP, its pension system is one of the world’s largest.
Pensions assets equated to 158% of GDP in 2015, according to the OECD, ranking the system third behind Denmark at 206% and the Netherlands at 178%.
Listed equities are the target
Meanwhile, Frjálsi pension fund in Reykjavik has put its investment policy under review, and the fund’s CIO Marinó Örn Tryggvason says it is likely to increase its strategic asset allocation to foreign assets.
“Our foreign allocation is 20%, and our current plan is to increase it to at least 30% in the next five years,” he says.
“I think that in the long run foreign allocation will be at least 40-50%,” he says.
“We are so underweight in foreign assets, and in the next year we will focus on increasing our allocation in listed equities,” Tryggvason says, adding that the allocation between countries will probably be similar to the MSCI world index.
Stapi’s reasoning behind a 40% target for foreign assets stems from the amount of goods the country buys from abroad.
“At 40% you have a nice level of diversification, and if you look at the weighting of our inflation index in Iceland, about 40% of consumer goods represented in it are imported,” Olsen says.
“You can easily argue that it makes sense to weight your portfolio in terms of what your members are expected to consume in the future,” he says.
Whereas most of Stapi’s foreign assets have been in equity, as the pension fund grows the international portfolio, it will include more alternatives such as real estate and infrastructure, Olsen says.
“We would more or less always outsource this through funds, because we don’t pretend to be experts on individual stocks abroad,” he says.
So, have pension funds in Iceland been bombarded with offers from foreign asset managers recently, now that the central bank has given them the go ahead to spread their wings?
“It is as if they can smell the money,” quips Olsen.
“The local managers have always been in touch with us, of course, but the overseas managers — some have stuck with us through thick and thin, and others have disappeared.
“Now, we have a closer relationship with the ones who have stood by us in all weathers, but of course in the end it will depend on the products quality that they are offering,” he says.
Frálsi, too, has had more asset manager approaches than usual.
“I think that is just as expected due to the pension fund system in Iceland being sizeable, and it is likely that we will see a portfolio shift to foreign assets,” Tryggvason says.
Icelandic pension funds have for the most part been successful with their foreign investments, he says.
“It is important to diversify and use some strategy when changing portfolio allocation — for example dollar-cost averaging,” he says.