Alecta is the largest manager of occupational pension assets in the Nordic region, with more than SEK 300bn (E33.3bn) under management. Formerly known as SPP (Sveriges Privatanställdas Pensionskassa) Alecta re-branded itself following a decision in 2000 to sell off all business activities that were open to competition in the market place – notably the life arm SPP Liv, now owned by Svenska Handelsbanken, and SPP Fonder.
Alecta derives from the Greek word ‘alectos’ meaning never-ending, always returning – an appropriate description of its core business of servicing the ITP occupational pension scheme for Sweden’s white collar workers. The quasi-monopoly mutual insurer develops, provides and manages collectively agreed pension plans for 27,000 companies and administers 1.4m insurance contracts.
Alecta Kapitalforvaltning is the group’s investment management arm. It is headed by Staffan Grefbäck, the 47 year old former head of the Nordea Group’s investment management operation Nordea Kapitalförvaltning.
When Grefbäck became president of Alecta Kapitalförvaltning in October 2001. He took over an operation which, historically, has steered a relatively cautious course in terms of investment strategy. “For almost 10 years Alecta has chosen a strategy that has focused on internal management with low costs and low relative risks, aiming to produce a consistent information ratio on these relative risks,” he says.
“The strategy has a conservative bias because it is a collective plan rather than a single sponsor with the possibility of choosing the risk level. As a collective plan it is important that we can fulfil the obligations in future without any radical changes in the assumptions.”
Asset and portfolio management is steered by a finance committee of the Alecta board which meets between the monthly meetings of the main board. The committee drafts investment strategy and monitors investment activities.
The most significant part of the strategy is the focus on efficiency, Grefbäck says. “This is founded on the assumption that a consistent positive information ratio, even if it is based on a low relative risk on a net basis, will be the long term beneficial strategy.”
Asset and portfolio management at Alecta is steered by a finance committee of the Alecta board which meets between the monthly meetings of the main board. The committee drafts investment strategy and monitors investment activities.
Bonds account for broadly half of the portfolio. Alecta is one of the largest investors in the Swedish fixed-income market, with 37% of its portfolio invested in this class. International fixed income accounts for a further 13%.
The equity component of the portfolio increased during the 1990s, largely as a result of legislative changes which allowed insurers to invest guaranteed funds in equities. Before, insurers were only able to invest free funds in equities.
Until the beginning this year Alecta had a strategic asset allocation of 40% equity and 7.5% real estate. However it has since adjusted its risk profile to take account of market conditions: “The implosion of the markets has led us to lower the overall risk level in the portfolio. So we’re operating today with a strategic portfolio somewhat below 30% in equities,” says Grefbäck.
The new strategy involves an increase in active risk, and a movement away from the domestic equities index. “Up until this year we have been investing fairly close to the index, with a limited active risk. But we have increased our active risk during this year in order to be less dependent on the index.”
Grefbäck says the investment team is now focusing on companies in the less volatile sectors within the domestic portfolio. “We have defined a specific portfolio where there is a strategy to select companies with more stable and predictable earnings. The rest of the portfolio is run exactly as before but with a minor increase in active risk.”
Alecta manages its domestic and European equity portfolios actively, customising the portfolios with numerous small weighting deviations against the comparison index. US equity portfolios, on the other hand, are mainly indexed, with only a small degree of active management. The Japanese equity portfolios are entirely indexed.
“The active risk is focused on the markets where we believe we have the possibility of consistently adding value,” Grefbäck explains. “The strategy has been successful for a number of years with a high level of information ratio on our actively managed part. We also produce the index for passive management ourselves with a small content, so we run this with no net cost over time.”
Currency hedging is an important part of Alecta’s investment strategy. International bonds within the fixed income portfolio are hedged. This year, Alecta also decided to hedge its real estate portfolio.
Real estate investment has increased from 7.5% to 10% as a result of its revised risk profile. “At present we see slightly deteriorating conditions in the real estate market,” says Grefback. “However, at the same time we have seen somewhat increased allocation towards that market on the part of some investors. So there are buyers in the market. But we are a little cautious.”
International diversification provides some useful protection against these developments. Two thirds of the real estate portfolio is invested internationally, the main part split between the US and UK, with a smaller part in the Netherlands. “The domestic market is the worst performing of the markets where we are present, so we are happy to be diversified in this area,” he says.
There is also a bias towards defensive real estate holdings. “Our aim is to have an optimum portfolio over time. So we review it continuously and change the structure as the conditions vary.”
Alecta is taking a softly approach to private equity. Less than 1% of the portfolio is allocated to private equity. “The money has been allocated but not spent totally. We spread the investments about half in Sweden and half internationally through funds. We’ve not taken any new decisions to increase the investments in private equity and we will evaluate that carefully before taking any decision. At present you could say that private equity investment is on hold.”
Other alternative investments, such as funds of hedge funds, are currently off the radar. “I wouldn’t rule it out but we have a traditional bias towards selecting transparent, cost effective solutions that are easy to understand and that have fulfilled certain criteria. We’ve not been convinced so far that hedge funds, which tend to be non-transparent and costly, meet these criteria.”
Alecta has regularly outperformed its peer groups and the indices until this year, when performance dipped with the equity markets. In the first half of 2002, the total return on investments was -7.8% compared with -0.4% in the first half of 2001.
“So far this year we are below our benchmarks, although we have outperformed over two years,” Grefbäck says. He admits that he was over-optimistic that the bottom of the market had been reached. “From our fundamental research we started to believe there was value in the equity markets a bit too soon. We have regained some of that now, of course, but we were a bit too early and that also reflects our stock selection.
“We haven’t changed our view that the market is undervalued,” he adds “But there are many uncertainties, so we are not expecting a rapid improvement.”
Alecta calculates that it needs a 5% return to fulfil its pension promises. Beyond that, the aim is to reduce premiums by creating a surplus. Last year its collective solvency reserves were so strong that it cut premiums by 15%.
However, this year collective reserves fell below the level, set last year, at which the Alecta board can take action. In October the board introduced a package of measures to improve the solvency ratio through changes in the balance sheet and raising premiums to the former level of 100%. These measures improved the collective solvency reserve by SEK15bn.
The October measures have not led to any changes in the investment strategy agreed at the beginning of the year. Grefbäck says that there is no need for change. “The choice of a new overall risk level of the portfolio is better suited to the overall solvency situation of the company. We think the portfolio is now well balanced for the needs of the fund’s liabilities.”
Alecta remains confident that it will, as its name suggests, always be returning.