Annual report 2002

Overview
In 2002, LD Pensions' investment assets were placed in LD Discretionary Investments and 10 investment pools. The investment assets of LD Discretionary Investments constituted 94% of LD Pensions' total assets as at 31 December 2002. Therefore, the principal sections of the Annual Report describe the investment strategy and the profit of LD Discretionary Investments for 2002.

The legal requirements in respect of LD Pensions' presentation of accounts imply that LD Pensions must report on the total result for all assets under management – i.e. LD Discretionary Investments and the 10 investment pools taken together. LD Pensions shall also provide a number of key figures for the total profit from all assets under management.

The structure of the Annual Report is as follows:

I LD Pensions' total profit – inclusive of LD Discretionary Investments and the pools.

II Annual Report for LD Discretionary Investments
> Gross and net returns
> Asset allocation in LD Discretionary Investments in 2002
> Danish listed equities
> Unlisted equities
> Foreign equities
> Bonds
> Property and subsidiaries

III Return on investment pools for 2002.

IV Key figures and financial ratios for 2002 - total assets under management.

V Overview of LD Discretionary Investments' foreign equity portfolio.

I. LD Pensions' total profit – inclusive of LD Discretionary Investments and the pools.
The total return on investments inclusive of pools was a negative figure of 11.8% before tax. This was not a satisfactory return, but it should be seen in the light of financial market trends. The very satisfactory return on bonds of 9.4% could not offset the loss on equities of 29.3%. [1]

LD Pensions posted a total loss of EUR 821.5m after expenses and tax on pension investment returns, which was the poorest financial result in LD Pensions' history. The unsatisfactory result mainly derived from tumbling equity prices throughout the world in the third quarter of the year.

The positive outlook in early 2002 was replaced by fairly pessimistic growth forecasts for the US and European economies in the spring. The central banks in the US and Europe tried to prevent this development by lowering short-term interest rates, but the desired effect did not materialise in the short run, and equity markets plummeted again during the summer. Both in Denmark and abroad, pension providers and other investors preferred bonds to equities, which caused a very high bond market activity level and sagging equity prices. Towards the end of the year, surging oil prices triggered by the Iraqi crisis enhanced the uncertainty prevailing in the financial markets.

II. Annual Report for LD Discretionary Investments

1) Gross and net returns
Equities, bonds and loans guaranteed by mortgage brought LD Discretionary Investments a total negative return of 10.6%.[2] This figure did not include a small, positive return on property and other amounts receivable. This figure was not satisfactory, but should be seen in the light of the general development of the financial markets. The members who did not choose pools in 2002 and whose entire pension savings were therefore invested in LD Discretionary Investments received a negative net return of 8.6% before tax, but after expenses. In the past five years, the net return has averaged 7.6% annually (before tax) for members who have never chosen any pools.

2) Asset allocation in 2002
Since 1 January 2001, minimum 30% of LD Discretionary Investments' assets have been invested in gilts compared with 50% earlier in accordance with the legal framework for LD Pensions, including LD Discretionary Investments.

At the beginning of 2002, LD Pensions found that despite the uncertain economic prospects equities offered an attractive pricing due to the significant price drops in equity markets throughout most of 2000 and the full year 2001. The fund's intention was therefore to reduce the proportion of gilts slightly in 2002 and increase investments in for instance corporate bonds and foreign equities and to keep a fairly unchanged portfolio of Danish equities. LD Pensions aimed to enhance the potential return through a slightly higher risk.

The proportion of fixed-interest bonds, Danish as well as foreign, declined by some 2% during the year reflecting redemptions and divestment in connection with the funding of the payments to members and the purchase of other assets, particularly foreign equities. Higher bond prices dented the decrease of the portfolio. Apart from corporate bonds, the proportion of foreign bonds was trimmed in 2002, partly due to funding requirements and partly due to historically low interest rate levels.

The portfolio of index-linked bonds was largely maintained at a constant level and price hikes during the year exceeded redemptions.

More corporate bonds
The proportion of corporate bonds grew by some 3% during the year. The rise was attributed to higher investments in High Yield bonds and investment grade bonds with a rating in the neighbourhood of BBB. The increase was made in anticipation that the asset class could contribute good properties in terms of diversification and excess return to the portfolio LD Discretionary Investments. The excess return relative to corresponding government bonds was historically high.

The proportion of Emerging Markets bonds in the portfolio remained largely unchanged. Like corporate bonds, this asset class has good properties in terms of excess return and diversification, and it generally fared well. The excess return potential seemed less evident late in the year relative to the risk and historic levels.

Net equity purchases
Based on for instance historically low interest rate levels, LD Pensions found that equities offered an attractive pricing in a long-term perspective, which could provide LD Discretionary Investments with a risk-weighted excess return. Thus, LD Discretionary Investments maintained its Danish equity investments and made net purchases of foreign equities in 2002. The proportion of Danish listed equities decreased by 3% in 2002. The fall was attributable to the substantial downturn in prices suffered by this asset class, as the total portfolio was not reduced by divestments in 2002. With a highly limited net sale of Danish equities, LD Discretionary Investments maintained its significant portfolio of Danish equities. This tallies with the long-term strategy of investing in Danish equities through portfolio restructuring when this is deemed expedient, and the strategy pursued in previous years was thus maintained in 2002.

The proportion of foreign equities fell by 2% in 2002 despite significant purchases. The price decreases seen in foreign equity markets were generally far heavier than in Denmark. The lower prices caused LD Pensions to buy a large number of foreign equities due to the apparently attractive pricing. With a higher proportion of foreign equities, LD Pensions aims to improve the diversification of the total equity portfolio of LD Discretionary Investments and to ensure that the portfolio is so liquid that major changes in the overall asset allocation affect prices only modestly. Focus is on cherry-picking and a certain degree of diversification as regards foreign equities.

Unlisted equities mainly in Danish companies offer considerable potential returns. This asset class is therefore maintained as an important asset class with a good return/risk balance. The proportion of unlisted equities grew to 5.3% of assets, which chiefly resulted from a generally positive development of the portfolio coupled with price decreases across listed equities.

Other investments
The portfolio of property investments was maintained at 2%. This asset class generates a stable return, but it often consists of very long-term investments. Therefore, new property investments are few.

Other assets, mainly comprising liquid assets and tax assets, rose on the back of the increase of tax assets in the form of tax on pension investment returns receivable.

The foreign currency exposure is partly hedged as regards the bond portfolio, whereas it is not hedged in relation to the equity portfolio.


[1] The returns are time-weighted and before tax, but after expenses.

3) Danish listed equities
In 2002, LD Discretionary Investments' portfolio of Danish listed equities yielded a negative return of EUR 467.2m, of which dividends and capital losses accounted for EUR 27.7m and EUR 494.9m, respectively. The total return was a negative figure of 24.3%, which was highly unsatisfactory. By way of comparison, the KFX Index and the KAX Index of the Copenhagen Stock Exchange shed 26.2% and 21.4%, respectively, exclusive of dividends.

The Danish equity market was characterised by a very unfavourable trend in 2002 like many equity markets abroad. Both nationally and internationally, business trends were weak, corporate earnings forecasts were gloomy, equities were subject to sales pressures reflecting capital adequacy problems in the banking and insurance industries and investor risk aversion mounted in general.

Heavy price decrease in major investments
The Danish equity portfolio of LD Discretionary Investments differs considerably from that of the Copenhagen Stock Exchange due to LD Pensions' long-term and selective investment strategy. Investments are assessed on the basis of thorough analysis of each company's ability to generate long-term earnings growth that is not mirrored in the equity price. LD Pensions' investment horizon is one of the longest of the players, namely five years in general.

The return on LD Discretionary Investments' Danish equity portfolio was slightly inferior to that of the overall Danish market in 2002. The principal reason was that a number of the companies in which LD Pensions had invested relatively substantial funds recorded a greater drop in their equity prices than the equity market in general.

The return on the Danish unlisted investments was satisfactory in the light of the difficult market conditions. The pre-tax return of EUR 18.4m consisted of securities revaluation and capital gains on divestments of EUR 15.5m net and dividends of EUR 2.9m.

Foreign unlisted equities contributed a loss of EUR 12.2m stemming from negative revaluation of equities of EUR 6.1m, a capital loss on mutual funds of EUR 4.9m and an exchange loss of EUR 1.5m. Furthermore, dividends totalled EUR 0.3m. The figure is included in the investment return for foreign participating interests.

The result was very unsatisfactory as it was markedly below LD Pensions' expectations of average annual equity investment returns. It was also inferior to the performance of the MSCI's World Index, which declined by 33.5% exclusive of dividends.

Foreign unlisted equities contributed a loss of EUR 12.2m.

International equity market trends
The unsatisfactory return derives from heavy price declines in international equity markets, mainly spurred by higher uncertainty about the sustainability of economic growth in the US, which failed to meet expectations despite lower interest rates and not least consumer-stimulating residential remortgaging. Owing to the situation in Iraq, the oil price soared by about 50% during the year, which contributed to lowering growth expectations.

In addition to lower growth expectations, corporate scandals, uncertainty about the pension obligations and debts of Danish companies and not least greater fear of war caused many investors to become less risk prone, which reduced their interest in or possibility of investing in equities.

Capital adequacy requirements resulted in equity divestments in the European banking, insurance and pension fund industries in particular. This prompted tumbling equity prices in most sectors.

Negative returns across the board
This development was also mirrored in LD Discretionary Investments' foreign equity portfolio, as all kinds of sectors and companies contributed negative returns to the portfolio.

The portfolio is overweight in pharmaceuticals, technology and telecom companies, which equities were characterised by considerable setbacks. Therefore, these sectors contributed most to the negative returns.

All sectors – except for technology and telecommunications – contributed to the negative difference in returns between LD Discretionary Investments and MSCI's World Index. Compared with the index, stock-picking contributed to the negative difference in returns in all sectors – except for technology and telecommunications. In other words, LD Discretionary Investments' overweight in technology and telecommunications did not exacerbate the negative return.

Higher investments
In accordance with LD Pensions' long-term and selective investment strategy, LD Discretionary Investments leveraged on the plunging stocks in 2002, investing substantial amounts in select foreign companies, as many companies were considered to offer attractive pricing in a long-term perspective.

In 2002, LD Discretionary Investments invested a total of EUR 404.8m in foreign equities, covering purchases of EUR 805.9m and divestments of EUR 401.1m. Thus, LD Discretionary Investments kept a high investment level as regards foreign equities, and the foreign equity portfolio almost equalled its Danish counterpart at year-end.

In the year under review, investments were made partly as a general expansion of the existing holding and partly as investments in new companies.

The strategy from 2002 is likely to be continued in 2003, as LD Pensions remains convinced that many companies offer attractive pricing in a long-term perspective. The continuing weak economic climate suggests a selective investment strategy in that such surrounding factors are expected to strengthen the companies with the best positioning and financial muscle at the expense of the companies of poorer positioning and financial strength.

The Danish bond portfolio generated a return of 10.0%, while index-linked bonds produced a return of 9.6%. By way of comparison, the J.P. Morgan Danish Government Bond Index picked up by 9.6% and the Nykredit Mortgage Bond Index added 10.2%.

The return on the holding of foreign bonds was 4.3%. The foreign bonds generated a markedly lower return than their Danish equals, because the bulk of the foreign holding (about 2/3) was invested in corporate bonds, which performed comparatively poorly in 2002 due to the very turbulent stockmarket.

The foreign part of the portfolio also comprises Emerging Markets bonds and Swedish bonds, and both investments generated highly satisfactory returns.

*The option-adjusted duration of Danish callable mortgage bonds is 2.5

Portfolio restructuring in 2002
In 2002, the Danish part of the portfolio was restructured with respect to different segments of callable mortgage bonds. The aim was partly to capitalise on price differentials, partly to adjust the portfolio to expectations of future interest rate levels. Thus, a modest number of long-term mortgage bonds was purchased in the spring months.

LD Pensions sold, mainly Danish, bonds worth about EUR 511,9m during the year. The purpose was to finance investment in other assets by way of the bond portfolio of LD Discretionary Investments. Yields and redemptions were also chiefly invested in other asset classes. The proportion of foreign bonds was increased marginally during 2002, and at the same time relatively considerable changes were made in the foreign portfolio.

In early 2002, the holding was primarily invested in High Yield and Emerging Markets bonds via third-party mandates and European government and mortgage bonds, including Swedish government bonds. In the course of the year, the portfolio underwent marked changes, and the euro part now mainly consists of corporate bonds. Furthermore, LD Pensions lifted the proportion of High Yield and Emerging Markets bonds and purchased Swedish mortgage bonds as an alternative to government bonds.

Strategy and perspective
Interest rates declined to a record low in the US and Europe during 2002, which lowered the expected yield on bond investments all things being equal. As LD Pensions does not anticipate any further marked drop in interest rates from the current levels, the bond portfolio strategy will continue to focus on a relatively low interest rate risk.

In the past two years, LD Pensions has built up a portfolio of corporate bonds, partly via third-party mandates and partly via direct investment in individual bonds. This trend seems set to continue so that the proportion of corporate bonds will go up in the course of 2003.

III Returns on investment pools
The two bond pools represented 1.8% of LD Pensions' total assets at year-end, of which the pool Danish Bonds accounted for 1.6%. The returns on the bond pools were slightly lower than the returns on the bond portfolio of LD Discretionary Investments. One reason was a lower risk and thus a lower return on the pool Danish Bonds.

The investment assets of the eight equity pools made up 4.2% of LD Pensions' total assets, and all the equity pools contributed returns that were slightly lower than the returns on the equity investments of LD Discretionary Investments. This was among other things due to the fact that some of the equity pools in specific sectors invested in the business areas with the poorest performance in 2002.

In July 2002, 12% of LD Pensions' more than 1.3m members had invested part of their savings in one or more pools. This figure increased in the autumn following the members' choice of pools leading to 13.8% pool investors as at 1 January 2003.

* Return before tax, but after expenses.

-------------

The interest rates from which the fund computed net returns (interest on member accounts) were calculated on the basis of the mark-to-market measurement rules in LD Pensions' Annual Report for 2002 after tax on pension investment returns and expenses.

The key figures are based on interest rates calculated on the basis of returns and price changes in respect of assets marked to market corresponding to the investment returns stated in the Annual Report. Three key figures are stated for the return because tax on pension investment returns influences the return. Some assets are subject to tax on pension investment returns (e.g. bonds and equities), whereas others are exempt (e.g. old index-linked bonds and some 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.

Return before tax on pension investment returns shows the return before tax on pension investment returns as a percentage of the invested funds, marked to market. Thus, it indicates the return that LD Pensions would have obtained with an unchanged investment strategy, if tax on pension investment returns was not payable. It shows what LD Pensions' return would have been if the Danish act on tax on pension investment returns did not exist.

Return after tax on pension investment returns shows the return as a percentage of the invested funds marked to market and 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 as a percentage of the invested funds, marked to market, which LD Pensions would have obtained if the transitional allowance was nil.

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 among the members. Costs in LD Discretionary Investments per member shows the contribution to costs that each member who is not a pool investor would pay if costs exclusive of pool costs were divided equally among them.

V Overview of foreign equity portfolio as at 31 December 2002


Listed equities

Unlisted equities

Mutural funds