Sweden implemented the EU pensions directive in 2006. It freed pension funds from investment restrictions allowing them to allocate according to the prudent-man principle.
In addition, last year saw the introduction of the of the so-called traffic light system, enabling the regulator, the FI, to identify pension funds that are in danger of not meeting their liabilities because of funding levels or asset allocation.
However, the country’s largest institutions, the AP funds, are governed by mutual fund laws so are not affected by the traffic light system and have government-specified investment guidelines.
As with their Nordic counterparts Swedish institutions benefited from allocations in domestic and other Nordic equities, which outperformed world markets.
SPK, the pension fund covering savings bank employees, returned 5.9% in 2006. This is above expectations because of increasing demands and regulatory requirements, according to a comment in the annual report by executive vice president and chief executive Peter Hansson.
Kåpan Pensioner, the SEK29.5bn (€3.3bn) pension insurance company for government employees, returned 8.8% compared to the insurance industry average of 8.3%. Its asset allocation at year-end was 40% in equities, 50% in bonds and 5% in real estate 5% in other investments.
The pension fund for media and information professionals, Pressens Pensionskassa, returned 9.5% last year. It has 36% invested in equities, 31% fixed income, including cash, 28% in real estate and 5% in hedge funds. In regional terms the equity portfolio was 35% invested in the Nordic region, 21% in the rest of Europe, 31% in the US, 9% in Asia including Japan and 4% in emerging markets. The assets are managed by 14 managers including three hedge fund managers. Its bond portfolio is handled by three managers, with Western Asset Management the only non-Swedish provider.
The trend of increasing equities versus bonds has been apparent in Sweden for some time, but other elements are becoming increasingly important. The focus has moved on to tactical and strategic allocation both in terms of types of asset classes and regions.
The low correlation between equities and fixed income in developed markets compared with emerging markets or alternatives, such as commodities or real estate, is attracting investors. Large funds are also separating alpha and beta in an increasingly complex and competitive world as well as moving away from market-weighted indices towards fundamental indexing. This means that the index is not weighted according to market expectations of company performance but instead captures reported fundamentals, such as p/e ratios and free cash flow. AP3 was the first fund in Europe to adopt the FTSE Global Wealth Europe Index last year.
Kersin Hessius, CEO at AP3, has said that in order to continue outperforming, regulation needs to keep up. In AP3’s annual report, Hessius says: “The regulations for the AP funds introduced by parliament in 2000 were, at the time, among the most modern and flexible for state-owned pension funds anywhere in the world. The only thing they did not cater for was the rapid pace of change on financial markets. With hindsight, the regulations should have included mandatory reviews of the investment rules.
“It is now six years since the pension reform and it is high time the rules were reassessed… The current investment rules for private equity limit our scope for investment in infrastructure assets, which are gaining popularity among pension funds. Our hope is that the rules will be reviewed in 2007, in an orderly process and without other alterations to the pension system.”
Last year the fund returned 12.6%. It also reviewed its portfolio structure and began researching the separation of alpha and beta, which it implemented in May this year. As well as continuing to develop its strategic and tactical asset allocation capabilities. It also continued to increase its use of derivatives and aims to invest in international real estate for the first time, as well as continuing to use derivatives as a strategic tool. At the end of June the fund shortlisted a number of managers for global tactical asset allocation mandates to complement its internal team.
During 2006 AP2 increased its quant portfolio to 31% from 11% and manages 77% of assets in-house. The fund’s investment professionals believe that you will get a better result with a few mandates with extremely low correlation. Poul Winslöw, head of asset management since the beginning of this year, says in the fund’s annual report that the fund is going to adopt a new structure with the separation of alpha and beta.
“Our high percentage of internal management is a key factor behind our performance,” says Carl Rosen, head of corporate governance and communications. “AP2 had a return of 13% 2006. The solid growth in fund capital comes from high allocation of equities in conjunction with limited foreign currency exposure. All asset classes noted a positive relative return.”
AP4 conducted an ALM study in 2006 that suggested that it should increase its equity exposure as well as investing in real estate, high-yield bonds and hedge funds. However, it found it needed more analysis before venturing into any new areas. In addition, the fund has changed chief executives appointing Mats Andersson, formerly CIO of Skandia Liv, following the retirement of Thomas Halvorsen.
In 2006 many of the funds implemented new innovative ways to deal with an increasingly complex and challenging investment environment, and 2007 promises to follow the same path of change.
Swedish institutions are well-documented investors in hedge funds and private equity but further alternatives are on the rise. An investment consultant says that infrastructure investment is on the increase and is likely to become the next big asset class among Nordic investors as it fits with their quest for long-term investments and low correlation to traditional asset classes. “This will also help to offload the pressure on the region’s bond markets,” he adds.
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