Last year the Swedish government launched the ambitious PPM project allowing employees to contribute 2.5% of their salaries to a choice of over 600 funds. Those employees not wishing to select their own funds can expect their contributions to end by default in the AP7 fund, the state-run buffer fund. Initial estimates suggested 30% of contributors would inadvertently opt for the seventh fund and this has proved an accurate prediction. At the latest count around a third of eligible Swedes indeed decided not to choose and consequently the fund now manages SEK20bn (e2bn)in assets.
Those running the fund used consultants extensively in preparation and called on Mercers for manager selection, Watson Wyatt for asset allocation and both KPMG and Wassum to set up the infrastructure. Together with Watson Wyatt they composed a structure not normally associated with Swedish pension funds. Initial proposals recommended investing between 80% to 85% in equities and 14% in Swedish index-linked bonds- the former lending it the appearance of a typical UK pension scheme.
At the time this seemed adventurous but the fund has in fact gone further and ended up with 90% of its SEK20bn in equities, 9% in index-linked Swedish equities and the remaining 1% in cash. Richard Grottheim, the deputy managing director of the fund, says that when they launched the fund the aim was to perform as well as or better than the average of the 600 funds on offer. Grottheim says that after the initial round of investment by the Swedish population it became apparent that 92% of Swedes had opted for equity rather than fixed income funds.
Hence the decision to up the equity stake in a bid to emulate the average fund. Breaking down the 90%, some 25% is in Swedish equities while the remaining 65% is abroad (35.75% in north and south America, 19.5% in the rest of Europe and 9.75% in Asia). To date the fund is down about 15% of its initial value but given the market conditions this is perfectly respectable and Grottheim says they are happy with performance.
In May it finalised its external investment manager line up by appointing Goldman Sachs Asset Management to run a E100m active European equity mandate and Carlson Investment Management to oversee a SEK800m active Swedish brief. AP7 looks after the majority of the Swedish assets, while State Street Global Advisors manages a quarter of them and Carlson a tiny slice. In both Japan and the Far East, the fund opted for an active approach. Nomura runs the whole Japanese allocation- a SEK1.1bn equity brief and Schroders oversees investment in the Far East brief- a SEK400m mandate that includes Australia, Hong Kong, New Zealand, South Korea, Singapore and Taiwan. State Street were appointed to run the US mandate on a passive approach. European investment meanwhile is somewhere in between- the portfolio is split in two with State Street managing one half passively and the other half is split further into two active briefs. French asset manager CDC IXIS also runs a SEK1bn European active core mandate.
Given the above breakdown, it is State Street that has the most to celebrate after coming out victorious from a run-off between seven large international investment managers. At the time of the announcement, Peter Norman, executive president of the fund said State Street were picked thanks to a combination of global reach and serviceability, “We were keen to make sure that we had experienced managers with world-wide expertise, but also of a size that would allow us to manage the fund while keeping costs down,” he said. From the starting line up of 13 managers, State Street was apparently one of only seven managers capable of complying with the reporting demands of the job.
Two months ago the fund hit the headlines by announcing it had blacklisted 30 companies from its equity portfolio following a scathing report on their environmental and ethical records. When the Swedish government launched the PPM system it attached the proviso that the default fund consider ethical and environmental issues. Announcing the decision the fund said that manufacturing landmines and discrimination against women were among the reasons for exclusion. Tobacco and alcohol producers, the bete noire of ethical investors in the US, were spared on the grounds that a lot of the population smoke and drink.