Posted inEquitiesNORDICS

Iceland fund selectors look for global equities

Icelandic investors only hold about 20% to 30% of their investments in foreign currency as a consequence of capital controls which were introduced by the Icelandic government in the wake of the banking crisis in the country                                                                                                        in 2008 (see box).

Iceland banned the conversion of funds held in Icelandic Kronur into foreign currency in November 2008 to stop the withdrawal of capital from the country and the subsequent slide of the currency. Though the capital controls were imposed as a ‘temporary measure’ to stabilise the Icelandic economy and the exchange rate of the Krona, they have been in place until this very day.

Diversification

The fund selectors our researcher spoke to on his visit to Iceland invest about 60% to 70% in global equities. Two reasons were widely cited for this focus on global stocks. Firstly, the fund selectors said global equities is the only asset class that gives them a reasonable diversification within the equity sphere, because the amount of foreign currency they are able to invest is so limited. Besides that, most fund selectors said they do not have enough resources available to do more specific country- or region-based research.

Nordic exposure

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While global equities are by far the most important foreign asset class for Iceland’s fund buyers, they also hold limited investments in region-specific equity funds. A number 

of fund selectors said they had widened their equity exposure to emerging market equities recently. Most Icelandic investors also own Nordic equity funds. Investments this asset class constitute about 10% of their total equity exposure. Iceland traditionally has strong cultural and economic ties with the other Nordic countries. Therefore Iceland’s fund selectors know this market well, and feel relatively comfortable in investing there.

Additionally, about a fifth of their foreign currency assets are traditionally invested in private equity. The relative size of their private equity portfolios is shrinking slightly though, as most fund selectors our researcher interviewed are currently channelling the
returns they generate from private equity investments into global equities.

 

Part of the Bonhill Group.