Danish pension provider Velliv has recently overhauled its investment strategy, placing greater emphasis on low-cost, index-based strategies in response to shifting client preferences. In a move that caught much of the industry off guard, Velliv disbanded its entire alternatives team along with several individuals responsible for selecting external equity managers – just ahead of Lea Vaisalo, formerly Head of Private Markets at Nordea Asset Management, stepping in as Chief Investment Officer. The shift reflects Velliv’s move to lower-cost investment options and highlights the growing appeal of passive strategies among its clients.

Client-Driven Shift Toward Low-Cost, Index-Based Investing

The decision to discontinue the teams overseeing external managers in equities and alternatives is “primarily client-driven,” says Thor Schultz Christensen, Deputy Chief Investment Officer at Velliv. “We offer three pension products: a classic actively managed product, a sustainable product, and a balanced product built entirely on index-based building blocks,” he explains. “The index-based option is more cost-effective, and demand for this type of solution has been steadily increasing – today, around 60 to 65 percent of all new pension contributions are directed to the indexed product.”

“The index-based option is more cost-effective, and demand for this type of solution has been steadily increasing – today, around 60 to 65 percent of all new pension contributions are directed to the indexed product.”

The decision also reflects broader global trends, with an increasing number of institutional investors turning to low-cost index funds to reduce expenses, according to Christensen. A key factor behind Velliv’s move involves the overall cost burden of managing pension assets – both internal costs and those associated with external managers. Christensen highlights an important distinction between commercial pension providers like Velliv and labor union pension funds when discussing cost structures.

Commercial vs. Labor Union Pension Funds: Cost Structures and Pressures

“Labor union pension funds have always had lower total costs because they don’t need a sales force and can offer the same investment portfolio to all members,” explains Christensen. “By contrast, we’re a commercial pension provider and offer a broader range of options.” Velliv provides three distinct product lines – an index-based product, an active product, and a sustainable product – each available in high, medium, and low risk profiles. “That gives our clients nine different investment options, whereas labor union pension funds typically offer a single, standardized solution and have a lower-cost setup,” he elaborates. “This structural difference puts commercial pension providers like us under much greater price pressure.”

“Lower costs are simply a ‘bird in the hand than ten birds on the roof’ – a guaranteed saving.”

“Lower costs are simply a ‘bird in the hand than ten birds on the roof’ – a guaranteed saving,” notes Christensen. For many years, active management has faced increasing challenges as passive strategies have proven to be a reliable and cost-efficient solution for many investors. “Since 2013, none of the commercial pension funds have managed to outperform that product,” he emphasizes. “For us, it’s about accepting how difficult it really is to beat a low-cost indexed product – one that charges half the fees of active products.”

Pausing and Managing the Alternatives

In mid-2024, approximately 10 percent of Velliv’s €45 billion investment portfolio was allocated to alternatives, encompassing private equity, private credit, liquid alternatives such as trend-following CTAs and commodities, as well as infrastructure and timberland. However, with the majority of new client inflows directed toward Velliv’s index-based product, “we recognized there was no room for new investments in alternatives,” explains Christensen. This realization led to the difficult decision to disband the entire alternatives team, including the Head of Alternatives.

“The old team was responsible for three main tasks,” Christensen begins. “First, making new investments, which is very time-consuming because you need to ensure you’re invited to participate in those deals. Obviously, we no longer need to do that,” he continues. “They also spent a lot of time evaluating various market opportunities to see if they fit the portfolio, which involved extensive internal discussions and fundraising efforts – all of which have now stopped.” Today, the only task remaining is monitoring the existing portfolio.

“We don’t include alternatives in the passive product. As clients shift from our active product to the passive one, we expect this to create a natural balance by pausing any new alternative investments.”

With Lea Vaisalo joining as CIO in early May – after years as Head of Private Markets at Nordea Asset Management – alongside a Head of Governance who previously spent eight years as Head of Alternatives at another pension fund, plus two younger team members, Velliv has the capacity to continue monitoring its existing alternatives portfolio. “We have two younger employees dedicated full-time to this, guided by two very seasoned illiquid investors,” Christensen notes. This means Velliv is not immediately selling off its entire alternatives portfolio.

“We don’t include alternatives in the passive product. As clients shift from our active product to the passive one, we expect this to create a natural balance by pausing any new alternative investments,” Christensen explains. With this client shift, stopping new alternative investments reduces the risk of Velliv falling behind the flow curve. “In that respect, liquidity becomes an even greater concern – we’d rather hold slightly too few alternatives than risk having too many.”

Restructuring the Active Product

The shift toward passive investing does not mean Velliv is abandoning its actively managed product entirely. “We basically made two key changes,” Christensen explains. “We decided to use our index product as the core of our active product. Today, 60 percent of the active product consists of our index portfolio, which means we no longer have any external active equity managers in that product – they’ve been replaced by this index-based core.”

The active product is now composed of 60 percent index-based exposure, 20 percent allocated to alternatives, and 20 percent to internally managed strategies where Velliv aims to generate alpha. “By replacing much of the external active management with the index product, our internal 20 percent allocation is actually more actively managed than before,” says Christensen. As a result, the overall portfolio now carries a higher active share than previously. “At the same time, we’ve reduced costs by approximately 10 percent through this replacement, although the challenge remains to generate internal alpha at least as effectively as external managers did.”

“This shift really is very much focused on the debate between active and passive investing. In redesigning our active product, we’ve come to accept how difficult it is to consistently outperform a low-cost passive product.”

This shift allows Velliv’s investment team to have “much greater control by eliminating overlapping positions.” When constructing an equity portfolio with eight active managers, achieving a tracking error above one is extremely difficult because their positions often overlap. “In that sense, we have better control now, without overlapping alpha bets,” Christensen explains. “This enables us to take on more active risk and ultimately achieve higher active share per unit of cost.”

“This shift really is very much focused on the debate between active and passive investing,” Christensen concludes. “In redesigning our active product, we’ve come to accept how difficult it is to consistently outperform a low-cost passive product,” he continues. “An index-based product starts with a significant advantage – about half a percent – due to its lower costs.” While Christensen does not rule out that, with the new CIO on board, Velliv might revisit its approach to alternatives or active management, he emphasizes that any future strategy must be based on a firm conviction that “it can generate sufficient returns per unit of cost – not just returns after costs.”

This article features in the “2025 Private Markets” publication.