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AP7 eyes diversification with EM, small cap equities

Sweden’s default premium pension fund AP7 plans to add emerging markets and small cap investments into its giant equities portfolio to increase diversification.

In an interview with IPE, Ingrid Albinsson, CIO of the SEK370bn (€39.2bn) pension fund, said: “What will try to do going forward is to get some more diversification into the equities portfolio. 

“We haven’t decided exactly how and when, but we will try to get more emerging markets and we will try to get bit more small cap exposure into the portfolio.”

Unlike the other large AP national pension funds in the Swedish system, AP7 is not a buffer fund to back up the state pension. It instead runs the default option within the Premium Pension System (PPM). The PPM is the part of the state pension that allows individuals freedom to choose their own investment providers and funds. 

“Because we have a lot of large caps and medium-sized stocks in the portfolio, we think we would be able to get some diversification by adding small caps as well, but at the end of the day, you always have to look to see whether the practice is as the same as the theory,” Albinsson said.

The pension fund’s inhouse investment team will look into the reality of implementing this diversification strategy.

AP7 is also to consider the use of risk factors, Albinsson said: “It is something that could diversify the portfolio more [but] we haven’t decided exactly when and how we will do this.”

The CIO added: “The aim of the diversification exercise is to create a more efficient portfolio, which will create more value for the risk we take.

“When the pension product was first created, there was a lot of simplification, but in the meantime, markets have changed, techniques have changed — and we have changed. It is possible now to develop our product by diversifying our portfolio and getting more efficiency.”

The organisation’s overall investments have remained largely unchanged over the past few years in terms of their asset allocation.

AP7 runs two funds which act as building blocks for its Såfa default premium pension product — an SEK257bn equities fund and an SEK112bn bond fund.

Proposals to reform the PPM currently under consideration in Sweden could result in AP7’s assets under management more than doubling in a few years’ time.

Under the new plan, the consultation for which closed this month, individual PPM savers would be required to re-evaluate their fund choice every seven years, with their savings being transferred to AP7 if they fail to express a choice.

If the ideas become law, the resulting extra business will serve to make AP7 more efficient, Albinsson said: “Economies of scale really do matter in the financial sector. It’s a clear advantage if you really have size.”

At the moment AP7 has a staff of 25, based in the Swedish capital, Stockholm. Albinsson said the company would “probably” look to hire more staff if its asset base was to double in size.

However, the balance of in-house and outsourced asset management was unlikely to change, she said. Some 30% of AP7’s assets are managed in-house, and 70% outside.

“We think it’s appropriate for us to have that, because we have a lot of beta in the portfolio, so that is best outsourced in order to get the economies of scale,” Albinsson said.

AP7 was an early institutional mover in sustainable investment, and has used the twin tools of engagement as well as stock exclusions for longer than most of its investor peers. It was working on bringing in ‘green mandates’, Albinsson said, as the pension fund continued with its plan to move into the clean tech area which it started a few years ago.

“At the same time, we’re not in a hurry to do this, because to get value out of this kind of investment, it takes time. We have been having a very active discussion, with targets of increasing our exposure especially in climate investments, but for us its more of a gradual increase,” Albinsson said.

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