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Impact Investing

IPE special report May 2018

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Business coming managers’ way

In line with much of Europe, Sweden is finding, to her cost, that the state pension system is buckling under the weight of welfare state expectations and responsibilities.
Last year, the government and opposition parties finally managed to agree on reform packages which, if all goes well, will come into effect next year. These reforms include the AP Fonden, six funds under the umbrella of an earnings-related pension scheme. There are severe restrictions on half of these funds, which must have a minimum of 85% of assets invested in fixed income. The other three are severely limited in their foreign equity investment – one is only allowed Swedish stock.
Alongside these funds, however, the government plans to introduce a premium pension system. At present the contribution on pay is 18.5%. The new proposals involve a 2.5% defined contribution, payable to the premium reserve system (PPM). The remainder will be allocated to the “pay-as-you-go” portion system, with benefits linked to increases in average earnings rather than inflation – this latter is a major change.
“Some parts of the system are up and running, but the complete implementation of the scheme has been delayed until autumn 2000, some 12 months later than anticipated,” says Peter Friberg, of Stockholm-based asset manager Hagstromer and Qviberg. “In theory, then, individuals should be able to choose from hundreds or thousands of mutual funds.” At the moment, however, the proceeds from this element of the contribution are tucked away in the Bank of Sweden, earning a small amount of interest.
One hurdle to the full development of the proposals, say many asset managers, is the trailer fee the PPM is demanding. “This is squeezing management fees to a low level,” says Friberg.
Nonetheless, foreign asset managers are showing interest, according to PO Ost at Carlson Investment Management in Stockholm. “The new proposals will, I believe, lead to the arrival of foreign asset managers seeking a piece of the action. At the moment, we have a disproportionately large number of managers, and we will inevitably see more consolidation, to cope with the globalisation of the market. Of course, some smaller operations will remain as niche players,” he says.
The PPM invited fund management companies to participate in the premium pension system in October, sending out an invitation to around 100 local asset managers to enter into a co-operation agreement. Those companies that applied and meet the criteria for participation, will join the system and manage the investment fund part of the new general pension system. A similar invitation to foreign-based companies went out later in the month.
Fund management companies wishing to participate in the system from the start must have signed the co-operation agreement by the end of last month at the latest, and must have registered with PPM the funds they wish to place in the system. Each fund management company may register a maximum of 15 funds. In the case of groups composed of a number of fund management companies, the maximum is 25 funds.
Ironically, the PPM originally feared that a large number of managers and funds would appear overwhelming to savers, and also involve technical and administrative difficulties. Unfortunately, the argument over fees means interest has been comparatively muted.
The appearance of external managers as the new system falls into place is predicted by Annelie Enquist, at consultant William M Mercer’s Stockholm office. “The major insurance companies account for around 65% of pension funds at the moment, valued at more than $150bn (e144bn). Mainly these are managed in-house with only overseas mandates outsourced externally. As the number of funds explodes, however, I would anticipate an increase in external managers from between 35% to even as high as 50%,” she says.
She also anticipates an increase in the number of consultants in the area. Four years ago, consultants on the institutional market did not exist and even now they are relatively thin on the ground. Indeed there is some resistance in this traditionally conservative country. “They add costs to the system and it is hard to measure what benefits they bring with them,” says one asset manager.
Swedes have always invested overseas privately, and there is no reason to believe that a part of the new flow of funds will not head in the direction of foreign equities once freed from government restrictions.
A comparison with private pension funds is informative. Typically, such a fund would have between 33% and 40% of its capital invested in equities. The state umbrella funds are, of course, limited to just 10% foreign equity investment. Equally interesting is the preference of most corporate pension funds. Most have different regulations resulting from ‘dispensations’ from the authorities. “It is very rare for such waivers not to be allowed, although all funds must have a ‘prudent’ policy towards investment,” says Enquist.
This trend towards domestic and foreign equities is echoed by Friberg: “Most company schemes ask for a higher proportion of equity access in their constitutions, and it is usually approved. The authorities could hardly say no to a company, such as Volvo, which wanted to invest in international companies.”
He doubts, however, that this interest in foreign equities has been triggered by the launch of the euro. “Some people have shifted some investment into pan-European funds, but historically Swedes have always invested in equities and a significant part of that investment has been abroad. I would describe the euro impact as minimal.
Ost concurs: “There is more and more investment overseas, especially in equities, which is hitting the bond market severely. Mutual funds obviously follow EU directives whereby up to 50% of of assets at market value can be placed in equities. If anything, most funds some 10 points less than that figure.”
He adds that most firms have revamped their research departments to view sectors rather than countries, in line with the rest of Western Europe.
Enquist is not so sure, and hints that the euro may well have had an influence in the moves towards the wider investment policy. “The Euro-zone has been discussed for a number of years as we moved towards it, and we are seeing an increasing number of euro-mandates. It is perhaps too early to detect any significant trends however.”
As new mandates appear, Ost sees the balanced mandate as the preferred option. “There are some specialist mandates, but there is no clear trend developing. Indeed, the choice seems to be driven more by consultants who seem to have a preference,” he says.
Friberg agrees, saying: “The new funds flow is definitely towards balanced mandates. Inevitably at the moment there is a great deal of interest in telecoms and new technology.”
One trend he notes, however, is an increased interest in pooled funds. “We are coming from a starting point of zero interest from the institutions in pooled funds, to much more involvement. They are increasingly attractive it seems, and certainly involve far less administration for the clients.”
Enquist points out, however, that most of the larger investors, categorised by assets of more than SEK500m (e58m) are likely to have specialised mandates, and so favour segregated accounts. The smaller clients are still likely to head towards pooled funds. Although, as Friberg points out, many mutual funds are aimed at the institutional investor, and are much more flexible than segregated accounts.
With property accounting for around 5% of pension fund assets, Enquist says that for the past two years there have been efforts to make the market more transparent. “We do not have any reliable real estate indexes. Consequently we know values are increasing, but do not have enough information to make important decisions on increasing exposure,” he says.
Other managers agreed that property holdings helped a balanced portfolio because of their prudence weighting, but were unattractive compared with other stock.
The last word on the looming battlefield in Sweden goes to Ost.
“We are not sitting around waiting for overseas managers to come and pick the plums. Speaking for larger asset managers such as ourselves, we are keen to go out and get some of the European mandate market.”

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