An avarice for absolute return
Pirkko Juntunen looks at the unique pension investment policy employed by Swedish construction company Skanska
Pension investment trends often follow a herd mentality. But that characteristic is completely alien to the investment style adopted by Jonas Granholm, group pension manager at Skanska, the international construction company headquartered in Sweden.
Looking at the asset allocation of the Skanska pension foundations it quickly becomes apparent that the average does not apply. Skanska has pension foundations in Norway and the UK as well as three Swedish foundations. Assets total SEK11bn (€1.2bn), so the funds are not large either by Swedish or international standards. But the company is definitely punching above its weight when it comes to its investment strategy and asset allocation.
Liability matching and risk management are both issues close to Granholm’s heart and he is puzzled that the pensions industry does not focus more on this. “First and foremost we have to think about our raison d’être. We are not asset managers, we are looking after pensions.”
Granholm has worked with research, risk management and built risk management models at a leading Nordic bank as well as at the Skanska internal bank after studying at Hanken School of Economics in Finland as well as Stockholm School of Economics and RPI in the US, before taking on his current role at Skanska.
Skanska’s pension foundations in Sweden are defined benefit (DB) structures, although the company also offers defined contribution (DC) plans to its staff.
Granholm is responsible for the asset management (together with local pension fund officials) of all DB schemes and is a board member in all of the pension trusts apart from the UK one. In the UK he sits on the investment committee, the sub-committee responsible for all asset allocation. He also sits in the pension committee of Skanska AB and reports to Hans Biörck, the CFO. Because of local regulations, such as prescriptive limits in Norway, and conservative allocation traditions and reliance on investment consulting advice in the UK, the foundations are not managed like the Swedish ones. “We would like to manage all of them in the same way but at the moment this is not possible,” Granholm says.
The Swedish foundations’ have total assets of SEK4bn and asset allocation is split between 24% in equities, 31% in bonds, 43% in alternatives and 2% in cash. The strategic portfolio has a 30% equity exposure, 35% fixed income and 35% alternatives, which can increase up to 45%. Currently the foundations actual equity exposure is 28% as all investment is done mainly through derivatives, Granholm says.
The derivatives are forward-rate agreements, which take away the timing risk from investing in stocks as long as the underlying economy is growing over the long term. “What we are doing is protecting our assets and at the very least we will get our money back using these instruments, Granholm says, arguing that the use of derivatives works as a perfect match for pensions. “Our pension liabilities grow by approximately 6% per year and if the stock exchange index is up 30% that is great. For example we put a cap at index x1.2 which creates a structure where we never lose money,” Granholm explains. The correlation of the derivatives are compared with the rest of the portfolio and should the stock exchange index fall by 30% then other parts of the portfolio will make up for it and still make money. Granholm says the use of derivatives and other techniques does not have to be expensive. “We pay around 18-30 basis points per year”, he noted.
The 43% allocation to alternatives is another rare fact. Of this allocation 23% is in real-estate, infrastructure, distressed credit as well as life settlement contracts, 4% in private equity and 16% in single manager hedge funds. Skanska’s alternatives portfolio has quadrupled over the last decade at the expense of the equities and bonds allocation.
“Our focus is absolute return for the entire portfolio and for everything we do,” again a fairly radical statement. The team’s philosophy is that if you invest 100 krona it is not good enough to have 85 krona left at the end of the year, even if the benchmark and peers only have 81 krona left- you’ve still lost money,” he says. The increasing liabilities further compound that loss. Granholm added that focusing on absolute return does not mean you never lose money but the important thing is the compounded average growth rate. “The most powerful force in the world is compound interest,” Granholm says, quoting Albert Einstein.
One of the building blocks in the alternatives allocation is infrastructure. The foundations recently bought a Norwegian highway. “This again is a very efficient matching of the liabilities in a pension scheme. You get an annual return based on the cash flow and the residual value after 25 years is zero. It is surprising that not more corporate pension funds in Sweden are investing in infrastructure or other assets such as wind-turbines and hospitals,” he ponders. In 2009, the foundations bought a detention centre in Stockholm and a police station outside Malmö together with a consortium of pension funds of Atlas Copco, Apoteksbolaget, Ericsson, Sandvik, Stora Enso and Volvo.
On the hedge fund side, the Swedish pension foundations are basically building their own fund of hedge fund business. “We have two fund of hedge fund on our books which we use as a kind of benchmark to see how we are performing ourselves. Beyond that we have single managers with some 6-7 different strategies,” Granholm says.
Granholm and Gustav Lundeborg, who is the managing director of the foundations in Sweden and works closely with Granholm, are meticulous in their approach to investments and have built their own models in order to analyse and optimise the mixture of strategies and mangers. “There are many moving parts and various measurements to check correlations between managers and styles and we try to make sure that we are as diversified as possible,” Granholm says.
“So far this year we have had positive returns which we are happy with,” he adds. Since year 2000, the foundations have returned around 6% annually. Alternative investments have during the same time period returned over 8% annually.
Granholm emphasises that apart from all the number crunching, soft values are often the most important in manager selection. “It is the people who make or break it. After all these years, you do get a feeling for who is serious and talented and simply just someone you are comfortable working with. It is about personalities and we want to get a good picture of the key members of staff and what they are about. We often meet the whole board.”
Granholm never uses the services of investment consultants in Sweden and does not see the value in them, but discusses managers with industry professionals in general and takes on board what he hears in the market as well. However, in Norway, investment consultant Grieg is used and LCP in London is used for the UK scheme, he says.
Considering the performance of the Swedish foundations, it seems that Granholm and his team are not only receiving useful information but are also able to interpret and implement it wisely.