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Alternative-Asset Price Warning Riles a $110 Billion Investor

Bloomberg logoBloomberg 9/8/2020 Frances Schwartzkopff
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(Bloomberg) -- Denmark’s $110 billion PFA Pension fund says regulations designed to make alternative assets less risky are having the opposite effect after the latest wave of extreme monetary easing.

After years of hoarding alternative assets, which are less liquid and harder to price than stocks and bonds, Copenhagen-based PFA says it’s now taking another look at the portfolio as new risks emerge.

Regulators in Denmark, which is home to the world’s best-funded pensions markets along with the Netherlands, have zeroed in on alternative assets amid concerns that pension funds aren’t always giving them accurate valuations. The Financial Supervisory Authority wants pension managers to show how they’re taking market swings into account.

But according to Allan Polack, chief executive of PFA, the requirement misses the point of alternatives. He says the rule risks undermining a key diversification strategy. That’s particularly unfortunate now, he says, as the prospect of never-ending, ultra-low interest rates makes balancing risk in a portfolio harder than ever.

“We have a regulatory setup that says, ‘OK, please re-evaluate these alternative asset classes when the listed market changed, because you need to compare them with these movements,” Polack said in an interview. But an asset can have “its own life -- the cash flow comes in, it does as it should.”

With record-low central bank rates undermining traditional diversification strategies, pension funds and insurers have spent the last years loading up on alternative investments, such as infrastructure projects and unlisted property. In the last quarter, the Danish industry added another $1.2 billion in unlisted assets. At PFA the asset class makes up 22% of its total portfolio.

“This is a regulatory debate on how you adjust the valuation while you are holding these alternatives,” Polack said. “Do you adjust them also to the market movements, or just to the underlying developments of this particular asset?”

Jesper Berg, the head of Denmark’s FSA, has made clear he won’t accept valuations driven by accounting techniques that don’t match reality. He says funds focus too much on short-term returns, when they should concentrate on safeguarding retirees’ income.

World’s Top Pension Funds Told: Drop Focus on Short-Term Returns

Meanwhile, the pension industry is trying to figure out how to adapt to a world in which diversification is increasingly hard to find. With record quantitative easing from central banks, stocks and bonds have started to move in tandem when crises hit. The sheer force of the monetary interventions has reverberated through all asset classes, including alternatives.

The question now is whether an illiquid asset that’s held as a long-term investment should have its valuation adjusted every time the market moves.

“You need to do some valuation exercises,” Polack said. But, “It shouldn’t automatically lead to readjustments, not automatically.”

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