Hedge funds, infrastructure and alternative risk premia are some of the new additions as Swedish pension fund SPK completes an overhaul of its investment strategy in response to low interest rates and new regulation.
The SEK24bn (€2.6bn) pension fund for saving bank employees has thrown out its former strategy of 70% domestic government bonds and the rest in equities in favour of a more diversified and modern approach.
Peter Hansson, chief executive at SPK, said: “These are the biggest changes in the history of the fund.
“Our allocation looks completely different now, and we have about 10 asset classes instead of just two.”
SPK, which relocated to a new office in central Stockholm a few weeks ago, has also reshuffled managers significantly as a result of the new strategy.
The fund has not only split the portfolio into a liability-hedging and return-seeking sections but also diversified its fixed income allocation and made, or is about to make, its first investments in infrastructure, real estate, hedge funds and alternative risk premia.
A total of 20% of its assets will be invested in alternatives, including real estate.
A smaller part of its 12% hedge fund exposure is invested in a multi-strategy fund run by Swedish manager Brummer & Partners.
The majority will, however, be dedicated to an alternative risk premia strategy – the latest fashion in institutional asset management.
Alternative risk premia strategies are systematic strategies aimed at gaining exposure to the uncorrelated return sources usually harvested by hedge funds but with lower costs.
Stefan Ros, SPK’s CIO, said: “The hedge fund industry in general is very expensive, so we’ve tried to be creative and look for alternative strategies that can achieve what the hedge funds do but to significantly lower costs.”
“The fund will complement the rest of the portfolio and be completely uncorrelated with equities – it will be a very well-diversified portfolio,” said Ros, who expected the mandate to be in place by the end of the summer.
Hansson added that introducing a risk premia portfolio cut costs in half compared with using traditional hedge funds.
The announcement of SPK’s new strategy marks the end of a lengthy and intense process that began a year and a half ago.
Due to the very long duration of SPK’s liabilities, the previous regulatory regime forced the scheme to have a large chunk of its assets in long-dated Swedish government bonds.
But a new discount curve, introduced at the end of last year, reduced volatility and opened SPK up for new investments, explained Hansson.
Furthermore, the allocation changes were also made in preparation for rising interest rates and as a response to a more challenging investment climate.
One of the most significant changes, according to Ros, has been the transformation of SPK’s fixed income portfolio.
“The natural step for someone who previously only invested in domestic government and mortgage bonds would be to move into the foreign equivalent,” said Ros.
“But we decided to go all the way. We’ve invested in a Goldman Sachs fund, which includes everything you can think of – like credit, high yield and emerging market debt.
“It’s a broad mandate run under very controlled forms we believe has the ability to make money in a rising interest-rate environment.”
SPK has also added a domestic corporate bond fund run by Handelsbanken, which manages its Swedish fixed income allocation alongside Swedbank Robur.
Its 8% allocation to real assets is equally split between infrastructure and real estate.
The infrastructure fund is a global core fund run by an as yet unnamed manager.
“Our real estate exposure is made up of a more cautious Aberdeen euro-zone fund we are topping up with a Nordic value-added strategy, a mandate that will be finalised shortly,” said Ros.
The fund’s total equity exposure remains unchanged, but it has added a Handelsbanken Swedish small-cap fund and reduced the number of global equity managers from four to two.
T Rowe Price and Carnegie are kept on as external equity managers, but it has sold its Aberdeen and JP Morgan funds.
SPK, which only invests in funds, decided early on not to use consultants but to run things internally.
Five asset managers – Danske Bank, Deutsche Bank, Goldman Sachs, JP Morgan and Nordea – have, however, assisted the fund and helped shape the new strategy.
The objective has been a portfolio that can deliver 5.5% in returns over a 10-year period.
“We’ve had the rare opportunity to think fresh and new and to start from a blank sheet of paper,” said Hansson.
“It’s been a fantastic journey.”