The Danes have more than 200 years' tradition for issuing mortgage bonds, making the system one of the world's most developed. Moreover, Denmark has a custom of debt financing their houses.
The efficiency of the Danish market for mortgage bonds is high and product supply is broad. Total volume is about 200 billion euros and the largest issuers in the market are Realkredit Danmark (owned by Danske Bank), Nykredit and BRF. The traditional mortgage loan has customarily been a 20- or 30-year loan with fixed interest. However, recently new products from mortgage institutions like short-term loans with variable interest, loans with only interest payments and loans with variable interest but with a coupon limit, have been launched with huge success. Hence, today less than 50 percent are financed by the traditional long-term loans.
A strong economy and the mortgage institutions' innovations have resulted in rapidly rising house prices. In the long run, house prices seem to be out of equality 's at least when compared with households' disposable incomes. As an investor, it is therefore important to know that the Danish mortgage institutions are premium rated by Standard & Poor's and Moody's, several with an AAA rating 's similar to the rating of the Kingdom of Denmark. Consequently, Danish mortgage bonds are characterized by relative low yields and extremely low credit risk.
Because liability management is as important as asset management, we presently recommend that our clients partly finance their houses with long-term fixed interest loans, if necessary without repayments. In that way, the house value is hedged against shrinking real estate prices, which often takes place with rising bond yields. The effect of lower house prices could therefore be compensated by lower mortgage debt.
The selection of Danish mutual funds is large and broad as Denmark is characterized by having a number of prime fund managers. Active asset managers in the country are competitive with foreign managers, especially when costs are considered. However, index linked mutual funds are less developed in Denmark than abroad.
Most of the Danish funds generate lower return than benchmark, so the ability to select the best funds is therefore crucial for future returns.
When selecting funds, it is important to be aware of several items. Newly launched funds often let members pay relatively high starting costs, and many funds are launched with bad timing. A continual focus on marketing costs is essential, as they can suddenly explode, for example, after a merger between a well-controlled fund and a fund with bad performance. Use of external custody reduces risk of high transaction costs and high portfolio turnover. In general, we see a potential for better corporate governance and openness within the Danish market for mutual funds.
One of Finansbanken's edges is that it selects the best mutual funds after having analyzed them. Investment strategy, confidence, costs and track record are some of the criteria continuously evaluated and independence means selection of the best fund. Generally, we do not recommend mutual funds of investment-grade bonds, as the cost level is too high compared with the relative low return from the bonds. Direct investments in investment-grade bonds are therefore preferable. Mutual funds are recommended within equities and high yield bonds, eventually combined with Finansbanken's equity selection portfolio, which has an excellent track record.