Austrian, Swedish pension funds shy from floating-rate investments

Austria’s APK Pensionskasse has “mixed feelings” about floating-rate investments and is unlikely to consider exposure at present, according to the fund’s chief executive Christian Böhm.

Böhm told IPE’s On The Record that the current challenge for its fixed income portfolio remained generating “decent” returns.

“Floating rates only make sense for us when the real interest rates are reasonable,” he said. “Because of the current financial repression and the lack of inflation forecast for the near term, we are staying away from them for now.

“Instead, we are looking for appropriately evaluated credit risks and as few real and nominal interest rate risks as possible.”

His caution on floating rate investments was shared by Stefan Ros, CIO of Sweden’s Sparinstitutens Pensionskassa (SPK).

Ros, in charge of SEK23bn (€2.6bn) worth of pension assets for the banking sector, said floating-rate products could eventually feature in the pension provider’s newly diversified portfolio.

“Floating rates could be of interest once interest rates start rising again,” he said.

SPK recently overhauled its investment strategy after Swedish regulator Finansinspektionen published details of the discount rate under Solvency II.

“The ultimate forward rate (UFR) introduced in the new valuation curve will reduce the volatility of our pension liability by 50%, which, together with the temporary interest rate floor, filled us with confidence that we could substantially reduce our [fixed income portfolio’s] duration,” he said.

Ros added that fixed income was still overvalued due to the country’s mark-to-market valuation of pension assets.

But he said that, in the wake of the UFR’s introduction, it was “not as bad as it used to be”.

“If we still want to do some liability hedging, swaps will be very useful, given the construction of the new curve,” he said.

For more from Böhm, Ros and Blue Sky Group’s senior fixed income manager Arjan Stubbe on how they approach interest rate and credit risk, see On The Record in the current issue of IPE.