Annual report 2001

Asset allocation

The allocation of LD pensions' assets at the end of 2001 is illustrated in the figure on page 7. The figure shows that investments in foreign equities and bonds increased significantly in 2001.

Equities

Foreign listed equities
LD Pensions recorded an unsatisfactory result in respect of investments in foreign listed equities in 2001, namely a negative return of 9.1 per cent stemming from capital losses of EUR 101m and dividends totalling EUR 31m. However, the result was better than the MSCI World Index, which dropped by 12.5 per cent including dividends.

Mounting uncertainty among investors about global economic trends and corporate earnings produced this unsatisfactory result. Rapidly decelerating growth in the US economy and the Federal Reserve's repeated rate cuts chiefly spurred the uncertainty and the large fluctuations in equity prices.

At the beginning of the year, LD Pensions was forced to invest in foreign equities at high prices due to its members' choice of investment pools. The large proportion of European technology equities also contributed to the negative result.

LD Pensions' loss was nonetheless smaller than the market average thanks to high returns on a number of shares. Another contributing factor was the significant expansion of its portfolio of foreign equities at attractive prices in the late summer following an increase in the ceiling on equity investments by pension funds.

Among the companies posting positive returns were Rentokil, Scandia Consult, My Travel, adidas-Salomon, Intel, Cisco, Computer Associates, Compuware and Nokia. By contrast, Reuters, Roche, ING, China Mobile and Qwest made a negative contribution to the return.

In the past few years, LD Pensions' holding of foreign equities has risen from EUR 268m to EUR 1,589m, representing 20 per cent of total assets at the end of 2001. Almost EUR 180m of this figure was invested in foreign mutual funds.

Danish listed equities
LD Pensions' portfolio of Danish listed equities produced an unsatisfactory result. With a negative return of 18.3 per cent, it underperformed the Copenhagen Stock Exchange's All Share Index (the KAX index), which posted a negative return of 14.4 per cent, and the Copenhagen Stock Exchange's leading equity index comprising the 20 most traded equities(the KFX-index), which recorded a negative return of 13.8 per cent.

The underperformance should be seen in the light of LD Pensions' selective and long-term investment strategy, which often causes LD Pensions' return to deviate from that of the market. Thus, LD Pensions' return was significantly higher than the market average in 2000, whereas it was lower in 2001.

The allocation of LD Pensions' equity portfolio continues to differ from that of the Copenhagen Stock Exchange. Danish investments, which were concentrated on industrials, made up the majority of the total holding and the weighting was 15 to 20 per cent higher than that of the KAX Index. Danish small and medium-sized companies accounted for 31 per cent of the portfolio, whereas they represented only 20 per cent of the total market capitalisation of Danish companies listed on the Copenhagen Stock Exchange.

Important equities
A major contributing factor underlying the underperformance was a decline of 65 per cent in GN Store Nord, 48 per cent in Vestas and 52 per cent in NEG Micon. However, this should be seen in the light of the price gains of these shares of 95, 234 and 210 per cent, respectively, the year before. The positive developments included Novo Nordisk, which rose by 20 per cent, and Topdanmark, which picked up by 21 percent. The acquisition of Midtbank by Svenska Handelsbanken also contributed positively to the overall return.

Danish unlisted equities
In 2001, LD Pensions' unlisted equities posted a return of 6.0 per cent before tax, exclusive of property companies. This result, which chiefly stemmed from divestments and IPOs, was satisfactory.

The flotation of Danionics represented the greatest individual contribution, while value adjustments also made a positive contribution.

The general economic slowdown, which began in the spring of 2001, also affected the unlisted area. This caused a number of companies to put off flotations, and M&A activities more or less ceased.

By the end of 2001, LD Pensions had invested almost EUR 269 million in unlisted equities, corresponding to just below 4 per cent of total assets. These funds were invested partly in R&D companies belonging to the IT and healthcare sectors, including biotechnology, and partly in industrial and service companies. In 2001, LD Pensions invested a total of EUR 24 million in equities, of which 11 were newcomers and 14 were already part of the portfolio. The size of the new investments varied from EUR 0.1 million to EUR 2.5 million.

Bonds

In 2001, LD Pensions recorded a satisfactory bond yield of 7.0 per cent before and 6.1 per cent after tax on pension investment returns. This compared well with the general market yields; the Nykredit Mortgage Bond Index generated a yield of 7.6 per cent and the J.P. Morgan Danish Government Bond Index produced a yield of 5.5 per cent. At year-end, bond investments totalled EUR 3,769 million, equalling 47 per cent of total assets.

The duration of the bond portfolio increased to 5.1 in 2001, primarily due to the sale of short-term bonds in order to finance investments in equities and to a lesser extent longer-dated bonds.

During the year, adjustable-rate loans made a breakthrough. The ensuing demand for long-term callable mortgage bonds contributed to generating a good yield. LD Pensions also recorded a satisfactory yield on Danish index-linked bonds and foreign bonds of 6.2 and 6.8 per cent, respectively.

Investment pools

Approximately 11 per cent of LD Pensions' members, or 158,000, chose to invest part of their savings in one or more of the nine investment pools in the autumn of 2001.

LD Pensions' investment pools are specialised sub-universes within LD Pensions' total investment universe. Generally, a selective investment strategy has been employed for the investment pools except for the KFX investment pool, which mirrors the KFX Index of the Copenhagen Stock Exchange. One of the nine investment pools is a bond pool.

In 2001, the bond pool was the only investment pool to generate a positive and satisfactory return of 6.9 per cent, whereas all the equity pools produced unsatisfactory, negative returns of between 4.8 and 27.5 per cent.

The total assets of the investment pools decreased from EUR 384 million on 1 January 2001 to EUR 303 million at the end of the year. The drop was caused by payments to members withdrawing from LD Pensions and the investment pool results for the year. The table below shows the investment pool results for 2000 and 2001.

The key figures have been calculated as described in the Executive Order issued by the Danish Financial Supervisory Authority on 14 December 1999 on annual accounts for LD Pensions.

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The interest rates from which the fund computed the interest added were calculated on the basis of the valuation rules in LD's Annual Report for 2001, the book value, where the fluctuations in the annual returns on bond holdings were evened out.

In contrast, the key figures are based on interest rates calculated on the basis of returns and price changes on assets computed at market value, where the annual fluctuations are fully visible. This does not entirely correspond to the interest added in LD's Annual Report for 2001. Three key figures are stated for the return, in that tax on pension investment returns influences the investment strategy. Some assets are subject to tax on pension investment returns (e.g. bonds and equities), while others are exempt (e.g. older index-linked bonds and some real property). Furthermore, most companies have a so-called transitional allowance where the tax on pension investment returns is reduced in proportion to the size of the savings made prior to the introduction of the tax on pension investment returns. Therefore, the investment strategy depends on the size of the transitional allowance.

Return before tax on pension investment returns is measured as a percentage of the invested funds calculated at market value. This shows the return that LD Pensions would have achieved with an unchanged investment strategy, if tax on pension investment returns was not payable. It shows what LD Pensions' return would have been if tax on pension investment returns did not exist.

Return after tax on pension investment returns shows the return measured as a percentage of the invested funds calculated at market value after tax on pension investment returns. It shows the actual return for the year including LD Pensions' current transitional allowance.

Return after adjusted tax on pension investment returns shows the return measured as a percentage of the invested funds, calculated at market value, which the fund would have achieved if the transitional allowance was nil.

It should be emphasised that if the tax rules had been different, as mentioned under the key figures, the allocation of assets would also have been different.

Operating expenses/annual investment returns (%) shows costs in relation to the funds distributed to members (the funds provided to cover LD Pensions' obligations to members). This key figure shows the reduction in LD Pensions' ability to add interest due to rising costs.

Costs per member shows the contribution to costs that each member would pay if costs were divided equally between the members.