Sampension: Why there are many reasons to be optimistic

Now is not the time to reduce risk, argues Henrik Olejasz Larsen, chief investment officer of Sampension, Denmark’s $50 billion pension fund for public and private sector employees. Talking to Top1000funds.com, he says corporate profits have not deteriorated, and although the market has been tested from multiple directions, the underlying optimism driving equity is strong enough to overrule the negative impact of geopolitical risk.

“The equity market fundamentals are okay, and there are many reasons to be optimistic. There is exciting technology that will change how we work and the totality of the wealth that is being created will be positive – even though it may be unequal in its distribution,” he says. Although he does warn that “bad news” will cause sharper falls than normal because equities are expensive.

Elsewhere, companies have integrated long-term supply chain changes since the pandemic. COVID also fostered corporate resilience, like the ability to drop elements in the supply chain without causing disruption, that companies are benefiting from today.

“In a short time span, companies have made substantial progress re-routing supply chains.”

But Olejasz Larsen also links underlying corporate health to fundamental changes in the way companies produce their goods, like the fact energy accounts for a much smaller component of production costs, for example. Moreover, because the material content of the goods a company produces is also lower, and the IP content much higher, goods are more resilient to economic risk.

The increased importance of IP in production is one reason why Sampension has partially replaced its historical value bias in the equity allocation, and taken statistically based value biases out of the portfolio.

Value, he argues, has been incorrectly measured by corporations for a while because it is often based on immaterial content relying on traditional balance sheet measures.

“Traditional balance sheet measures of value can be misleading when there is a large amount of Intellectual Property in a company,” he says, explaining that the balance sheet captures tangible assets but can miss intangible value like software, patents and brands that can make the book value look artificially low and not fully reflect the real value of a knowledge-driven businesses.

“What we are seeing today is different to the run-up to the dot-com bubble when there were high valuations, but no income in those expensive companies.”

Sampension still has a value bias inasmuch as the team aims to buy cheap and sell high but has introduced a more nuanced set of quantitative overlays to the portfolio. Today, different versions of momentum play a much larger role.

Another strongly performing part of the portfolio is a 4 per cent allocation to commodities (rare amongst Danish funds) that sits in the real assets bucket. The allocation was designed to mitigate inflation risk – alongside linkers in the bond portfolio – and was never deliberately tasked with seeking returns although it has been a powerful source of returns in recent years. Exposure comes via swaps priced off underlying indices of commodity futures.

“It is not a large exposure, but it has performed well earning substantial double digit returns that have contributed to our total return,” he says.  

Other parts of the portfolio are giving cause for concern however, like real estate, by far the largest part of Sampension’s unlisted exposure. Olejasz Larsen reflects that the local market has been hit by a drop in the number of real estate transactions and fall in prices, driven particularly by the higher cost of financing. Commercial investors in Danish real estate that typically rely on leverage have been hit by the higher rate of financing, he explains.

“Today most banks or other lenders will require that rents must cover interest rate expenditure or, if interest rates go up, they expect lower leverage. It’s caused a standstill for a number of years in the local market, and it has kept prices stale.”

While Sampension “sits out” the moribund state of the market, the fund is also using its investment capacity to explore new options. For example, it is exploring development-oriented projects where there is less competition. “We are one of the few types of investors that are not really restricted on financing side,” he says. Although he notes that development projects also take a long time to come to fruition.

A recovery in private equity?

Olejasz Larsen is more buoyant about a recovery in private equity. Sampension invests directly in Danish private equity in low-risk, low-leverage strategies. The fund integrates more risk in international (developed) markets, investing via funds in levered, optimistic strategies that also tap into co-investment.

The portfolio has experienced very poor results over the last three years on a relative basis. But he is marginally more positive on the asset class ahead, noting the uptick in transactions. He also observes a broadening income for corporates across sectors beyond just tech.

“We are seeing a broadening of income to other parts of the equity market and beyond just a few expensive companies, particularly amongst mid-sized and smaller companies.”

The trickle-down benefits from AI is a large part of the story. He notices companies are spending more on AI and technology to optimise production and automate. On one hand it is concerning because companies risk investing more in growth than the growth in total demand. But he also notes that many companies need to catch up after a long period of underinvestment due to the pandemic and higher interest rates in 2022.

Risks on the horizon include inflation (more in the US than Europe) but longer-term he is more worried about the levels of government debt. Nominal interest rates account for a smaller portion of total investment risk, and Sampension has now build in more emphasis on long-term real interest seams.  

Unlike in private equity, Olejasz Larsen doesn’t see any fundamental signs of widespread weakness in Sampension’s credit allocation. He actually notices some improvement of earnings amongst mid-sized and smaller companies where the fund lends. “We don’t see a very clear sign that there is a problem although there are always risks you cannot see. We haven’t reduced our credit exposure.”

Another element of the portfolio that is doing well is renewable assets. Renewable assets were the best-performing asset class in 2022 as a result of the jump in electricity prices. However, the fund has not invested in renewables in Denmark as much as it would like, stymied by the availability of new projects, bottlenecks in approvals and a constrained pipeline despite political ambition.

“It is increasingly difficult to get projects through local approval because of resistance amongst local communities. We have capacity for more,” he says.

Sampension seeks investments that are modular and repeatable, avoiding large offshore wind projects. It is building up the allocation to biofuels as well as dual thermal energy, a platform and can have a number in Denmark and surrounding countries. Not done any investment in grid energy infrastructure looked into battery investments but not found anything yet, economically viable.