Sweden’s AP7 is planning to boost investments in alternative assets to reach around 20% of its total assets, fully leveraging from the opportunities offered by new rules to further diversify its investment portfolio.

The pension fund will increase allocations to private equity from the current 4% to almost 10%, adding 8% for real estate investments as a target, and 2-3% for infrastructure, chief executive officer Richard Gröttheim said yesterday speaking at the BAI Alternative Investor Conference in Frankfurt.

It will likely also add private debt as an asset class to the mix, but it will move first into real estate and infrastructure, the CEO said, adding that it will look for partnerships with other real estate investors in Sweden or abroad to build a portfolio over time.

According to the CEO presentation, adding alternatives to its portfolio will lower investment risk and improve expected returns over time, assuming that investments in global non-listed real estate will return 6.5%, private equity 9%, and infrastructure in Europe 5.7%, against volatility of 12.1%, 22.5% and 10.8%, respectively.

The scheme has been investing in private equity for the past 20 years, using funds of funds, and from 1 January 2023 was allowed to allocate to real estate and infrastructure for a total of 20% of its assets, an option that will make the portfolio more efficient, according to Gröttheim.

AP7 uses fund of funds because “we believe generally in an outsourcing strategy, we don’t believe we can get the skill in Sweden to invest in some asset classes as professional as if we outsource to managers around the globe,” he said.

AP7 works with Northern Trust, BlackRock and UBS for its passive investment portfolio, and with four providers for private equity.

“Alternative investment is more complicated than other parts of a portfolio; the transparency and openness in that field is more important,” he said.

The pension fund runs a fixed income and an equity fund, with a life-cycle programme reducing risks for members approaching retirement to pick up equity and illiquid premiums, and low fees.

For members joining the scheme before 55 years of age, AP7 invests 100% of the assets in the equity fund, reducing the amount to 33% for members over 75 years old, when the remaining 67% of the assets is invested in the fixed income fund, according to the CEO.

The SEK905.2bn (€89.8bn) national pension fund has seen its returns improve compared to that of private funds from 2011, when the government allowed the scheme to increasingly take risks in equity and private equity, reutrning almost 400% over time since its inception in 2001, compared with a 194.1% return recorded by private funds during the same period, according to the presentation.

“We have a higher risk [level] than the average savers in private platforms, we have lower fees – it is in our competitive edge to have that – and we have diversified into global equities more than into Swedish equities, and private equity will grow over time,” Gröttheim said.

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