Sweden's asset managers are looking forward to a period of rapid change and expanding opportunities. Foreign players are taking an interest too, reports Hugh Wheelan.

In Sweden they call it the 'Ketchup Effekten'. You wait and wait for something, and then suddenly everything happens at once - just like shaking a ketchup bottle, getting nothing out, then ... whoosh... it all pours on to the plate in one go.

It is an appropriate metaphor for the current transformation of Sweden's pensions industry, and the subsequent 'sauce' being sought by the local asset management industry.

Furthermore, the relish of moving into an increasingly lucrative Swedish investment market is attracting hungry foreign investment managers - with all eyes on Stockholm and the developments in progress.

And it truly is a revolution. Across the board of the Swedish pensions system - from supplementary pension provision for blue and white collar workers, through the overhaul of local municipality and regional council retirement schemes, and on to the implementation of Sweden's new social security/DC mutual fund arrangement next year - the sauce is flowing like never before.

The greatest influx of new institutional money into the Swedish market has been through the previously unfunded DB plans of the country's 288 local councils (kommuner) and 24 district authorities (landsting). Government guidelines issued this year require them to document their investment procedures and control of risk for civil service employee pensions.

The guidelines have already prompted around 50 of the kommuner and landsting to outsource their pension fund assets and implement an 'unfunded' DC system with annual contributions of 3.4% of salary (1% more for salaries over Skr280,000). And from 2000 at least 1.1% of this 3.4% will be freely available for investment by the employees themselves (see page 27). Many municipalities have been prompted to see the value in funding all contributions, completely removing the previous balance sheet provision.

Significantly, no restriction is placed on fund investment, as is the case with equity ceilings in other European local government schemes. The result is a propitious market on offer to the country's asset managers.

Investment is left to a UK-style prudent man approach, although as P O Öst at Stockholm-based Carlson Investment Management explains, this has not led to any wild portfolio weightings. Reflecting their status as responsible government bodies, the kommuner and landsting have started out with fairly conservative benchmarks set at around 70% bonds and 20% equities - predominately in the domestic market. It is very much a safety-first, feel-good process, gradually becoming more adventurous as investment confidence grows," he says.

According to Öst, Carlson has landed 12 of the municipal mandates, representing around Skr1bn ($124m) in assets, with the other major players in this sector of the institutional market proving to be the big Swedish banks such as SE Banken and Alfred Berg.

Nils Jutterström, client executive at SE Banken Instutionell Förvaltning, the bank's institutional arm, says it has won around 15 of the local authority briefs, and is also impressed at the safety-conscious professionalism of its municipal clients in the investment process.

Current estimates are that about 40% of all the local and regional authorities will instigate similar pension funding arrangements. Others will look to insurance cover and other alternative investments, or at least to partial outsourcing, but all will make the switch from DB to DC provision eventually.

On the white collar side of the supplementary pensions arena, the ITP (sick pay insurance and supplementary pensions), the preference is still very much for the security of book reserve DB schemes or insurance. Historically the ITP insurance sector has been the monopoly of the SPP, which has acted as sole provider to the system since the early 1960s.

However, the number of large, predominately white collar companies that have transferred to a company pension fund system, citing the inherent flexibility and investment advantages against previous balance sheet holdings, is steadily rising. Volvo was first in 1986. Others include telecommunications group Telia and the Swedish post office organisation (see page 26).

And according to Ola Björkmo, partner and head of asset management at Öhman Asset Management - which markets itself as an aggressive non-stock-picking manager, with an overall investment weighting of 55% Swedish fixed-income and 45% equities (90% Swedish) - every Swedish company is looking closely at the issue.

Unsurprisingly, the clamour for this business amongst asset managers is just as loud as for the municipality money, despite a lengthy transition process.

"The company tide is flowing in the pension fund direction and we are running a few mandates for groups, but the process is still moving relatively slowly, possibly because companies have other issues to consider which take precedence over pension questions," Björkmo adds.

Steffan Elmgren, vice president at SPP's investment management arm, says the company pre-empted this shift to pension funding in 1994. "We realised we would inevitably begin to lose some of the white collar business over time and so SPP Liv (Life) was born, both to court pensions business, garner the lucrative market for early retirement in Sweden and compensate for the white collar monopoly dissolution. SPP Liv will also be in the running for next year's PPM mutual fund money," he says.

Significantly, the debate now raging in the country is whether the entire white collar supplementary branch, the ITP, should follow the lead of its blue collar counterparts and become a DC system.

As a result, asset managers are rubbing their hands in anticipation over the expected institutional investment landslide.

However, as a number indicate, it is not a new debate, and has been on the pensions agenda in Sweden since 1994 with countless resolutions announced as 'imminent' over the years.

In the case of Sweden's blue collar workers, radical change is already under way in the pensions system. The STP (special supplementary pension) scheme was previously operated on a terminal funding basis through the AMF union linked insurance group (part of SPP until 1991) with employer contributions of 3.15%. This will now operate on a DC basis with equal contributions of 2% each from employee and employer. AMF will still act as distributor for the money, but the assets will now go to an insurer chosen by the employee from around10 authority-registered providers.

In its insurance capacity AMF will be among these groups, as well as managing the money for workers not expressing an insurer preference, which it is predicted could represent around Skr200bn.

Billboards all over Sweden are plastered with adverts aimed at attracting blue collar workers to individual funds and unit-linked products. The proposed 10 includes banks with insurance capabilities, such as SE Banken, alongside union-supported insurer Folksam and life insurers Skandia and SPP Liv.

Elmgren believes that the fight may be on for blue collar investment business, but the battleground is not that even. "The main volume of the business is expected to stay with AMF, obviously because of the arrangement where they also pick up the no-preference investment. But groups like Folksam are also expected to do well. SPP is hoping there will be those who do not wish to be dictated to from above and will choose their managers carefully."

SPP itself will be offering a number of funds to entice employees, including Swedish equity and mixed funds, as well as a staggered system of varied funds for different age groups and third party broker funds through Capital International and Schroders.

Undoubtedly, though, next year's launch of the premium pensions system or PPM (Premie Pensions Myndigheten), to replace the current social security system, will be the garnish on top of the current investment platter being chased by Sweden's asset managers (see page 25).

Jan Bernhard Waage of Wassum Consulting believes the attraction of the PPM, on top of lucrative institutional prospects, could mobilise foreign managers, now sizing up the Swedish market, to invade in force. "Every manager will have a fair crack of the whip under the PPM because they will all be catalogued together and the public will choose a manager, although obviously recognised names should do better. So at least foreign managers will have direct distribution access."

Peter Friberg, managing director at asset manager Hagströmer & Qviberg, echoes the point: "This will be one of the world's biggest unit-linked systems, and with Skr34bn from the last two years' contributions up for grabs, to be topped up by Skr15bn-20bn annually, interest is at fever pitch amongst Swedish managers to put existing Ucits products to work for the PPM money - but even higher for foreigners looking for a way in to Sweden."

Fidelity is one foreign manager that has already made the move, establishing a Scandinavian base in Stockholm in November 1996.

The Nordic set-up does not directly manage any segregated accounts, with Swedish mandates handled from London and some investment handled through Luxembourg SICAVs. Mike Nikou, sales director for the Nordic region, explains: "Lots of Swedish asset managers use Fidelity funds and on the Ucits side we have a distribution agreement with Skandia that has given us a 40% access to the unit-linked market. But we also felt we really had to have a presence in the Nordic market, and especially in Sweden, because it's also a sign of our long-term intention and gives our clients the reassurance that we are not just here for the quick buck."

Flemings is another already established in Sweden, offering its bottom-up stock-picking equity investment tactic to the market. Its overall strategic approach mirrors the Fidelity style, via London and Luxembourg, and on the funds side Flemings operates through local Nordic brokers, preferring to have one or two strong players to sell through in each market.

Tero Viherto, managing director at Flemings, says the future is looking bright for the foreigners. "With the focus on better returns in Sweden, we feel well placed at Flemings because our UK-style balanced portfolios are benchmarked against other managers, which is a higher risk, higher return strategy not employed by Swedish managers. Also, as pension funds become more popular and start looking to implement more global and specialist country mandates, we believe the market will very much favour the larger more diverse foreign managers," he says.

With its long history of equity investment, as a result of bond prohibitive tax laws, Sweden's asset management industry has traditionally operated on equally split portfolios, predominately in the domestic or Nordic markets. And overall, the institutional market is still marginally dominated by the banks and a couple of larger players, creating a need for niche philosophies amongst other smaller companies.

Björkmo believes Öhman Asset Management is one such operator. "Our size factor means we don't stock pick, but at the same time it has prompted a very aggressive approach to benchmarking here. We have the guts to differ from market benchmarks in stocks, particularly in Sweden, and have set out our stall as such in the industry," he says.

Another investment manager chasing the glut of new business under a specialist banner is Trevise Unibank Investment Management (TUIM), with a total Skr110bn under management in Stockholm and Copenhagen.

Lars Källholm, head of institutional clients at TUIM: "We are a client-driven organisation with a stringent and consistent investment process optimising investments within given risk mandates. In addition, we also believe that delivering performance is not enough in this increasingly competitive market. You also have to out perform in client service, risk control and reporting." TUIM is also looking elsewhere for new business, having established offices in Stockholm, Copenhagen, Helsinki, London, Luxembourg and Frankfurt.

Clearly, the overall trend is for an ever more fragmented and competitive institutional investment market, as company's scramble to gain a sufficient foothold on the current gravy train.

The recent turbulence in the markets has obviously had an impact on such an equity-focused culture, but most managers emphasise that their predominance in Nordic investments has sheltered them from the eye of the storm.

Viveka Ekberg, head of institutional asset management at SE Banken, which holds a minimal amount of around 20% of its overall foreign assets (20% of the portfolio) in the Far East, explains: "In line with the markets we have dipped in the Far East, but not underperformed, and we don't see Asia as anywhere near as great an issue as how we allocate between stocks and bonds, for example. If anything the market slump has prompted greater risk and asset allocation awareness in Sweden. Our clients are very calm though at the moment - indeed, we had one who told a colleague on the phone recently not to worry about the markets as they had seen it all before."

Similarly, greater competition has engendered change in the Swedish market, as Ekberg notes. "There is a recognised move towards openess and accountability in the field, as investor choice widens and a broader understanding and scrutinisation of performance and philosophy develops. I think it's fair to say that, as a result of this culture shift, the asset management industry in Sweden is working harder than ever before for its business and to stricter controls such as the AIMR/Gips guidelines, which is a good thing for clients."

The advent of the euro is also of prime concern to Sweden's asset managers, although the consensus is there will be no portfolio changes while the krone remains. But preparations are being made for the day if, or more likely when, Sweden's pension fund liabilities switch to the euro, with most asset managers predicting the country will follow the UK in, once Emu has proved its worth. Accordingly, many of the bigger players are fixing their sights on increased management capabilities overseas.

Carlson, for example, already has prominent interests in the US and Hong Kong. Alfred Berg operates extensively through parent company ABN-Amro in Europe, Sanford Bernstein in the US and Cazenove in the Far East.

If anything, the message from Sweden's asset management community is that it does not want to be a backwater operator on the global investment seas, and the opening up of the Swedish market to foreign investors will not signal any one-way traffic capitulation.

Strong domestic growth, low prices and greater competition are bringing out the tiger in the Swedish asset management market. Now it has smelt the investment feast in its own backyard, it is looking for more of the same overseas."