Nordic Region: Under one roof
By bringing asset management in-house, Skandia aims to bring new products to the market, says Pirkko Juntunen
Over the past year Skandia’s life and pension insurance arm (Skandia Liv) has been taking advantage of a unique deal whereby it purchased Skandia AB from Old Mutual.
Hans Sterte, head of asset management at Skandia Liv, says the deal was unusual in Sweden but not unique elsewhere, where life [pension] companies can buy their own distribution channel. The deal, mainly financed through the sale of equities and real estate, made Skandia one of the largest mutual insurers in the Nordic region.
Skandia Liv has also created a separate asset management arm, Skandia Investment Management (SIM), which will manage Skandia’s life assets, a portfolio of SEK300bn (€35.8bn). Skandia manages 50% of these assets in-house while the remaining SEK150bn is outsourced to specialist managers. However, ALM, allocation and risk management will remain in-house. Skandia Liv has SEK440bn in assets under management.
The Swedish regulator, Finansinspektionen, has granted Skandia Liv permission to start this company, expected to be up and running by 1 May. The reason for creating the separate asset management unit is to increase the product offering and use in-house expertise to attract more customers. “Almost one in 10 krona in savings in Sweden is managed by Skandia,” says Sterte.
Sterte says that over the past 10 years the life arm has created its own asset management organisation and brought assets back in-house. “As a result of the acquisition of Skandia AB, we have been able to bring Skandia Liv’s group asset management expertise under one roof. The creation of Skandia Investment Management is an important milestone in Skandia’s development,” he says.
“We will continue to be flexible and use a mix of in-house and external managers in order to ensure there is still a competitive edge in our various mandates.”
Skandia Investment Management will be headed by Lars-Göran Orrevall, currently head of investment strategy at Skandia. Orrevall says the initial strategy will focus on creating products based on some of the more unique or complex asset classes in the life portfolio and in making them available through funds: “This could be real estate, credit, private equity, commodities and infrastructure, which may result in products not currently available in the markets,” adding that existing and potential new institutional investors have shown an interest in alternative ways to access these types of asset classes.
Skandia Liv’s strategy over the past five years has been to increase the robustness of its portfolio so that it can withstand a range of scenarios, according to Sterte. “We want to spread our assets to varied sources of risk that are uncorrelated. The idea is that we should never lose significant amounts, even when a particular investment does not go our way,” he adds.
This strategy has meant gradually reducing the equity allocation over the past few years. The equity portfolio is currently 29% of total assets. Within equities, SIM has increased its emerging markets exposure to 6.5%. It will probably continue to invest more in this market, at the expense of developed markets, because of the positive growth aspects of emerging economies.
Last year, Skandia also increased its weighting to North America, at the expense of Europe. “North America has come further in the recovery than Europe and is also ahead of Europe in dealing with debt issues,” says Sterte. “I am not saying it has solved the issues but it is dealing with them, and at least beginning to dismantle the debt burden, whereas within the EU it is continuously just pushed forward.”
SIM also invests in private equity but via funds rather than directly, with a 7.5% allocation to the asset class. As a result of the purchase of its owner, SIM also has an 8.5% strategic allocation to Skandia AB.
An increase in allocation to alternatives is another significant change at Skandia over the past few years, for example to property, infrastructure and commodities.
SIM only invests directly in Swedish property. “We have our own real estate company and believe we can manage it best in-house. We continue to find diversification so we do not see the value in going outside Sweden or the sectors we do not know. We are a true long-term investor in this asset class,” Sterte says.
Recently, SIM reduced residential property in favour of retail, such as shopping centres. Sterte says these types of investments suit a long-term investor as the contracts tend to be very long and secure. The entity invests 9.5% of its assets in real estate.
Skandia Liv began investing in infrastructure about three years ago and now has 1% of total assets allocated to this asset class. “We aim to gradually increase this allocation and build this up to a meaningful allocation,” Sterte says.
SIM uses external providers for three-quarters of its infrastructure investments, while the remainder is managed in-house. Skandia has bought assets in social housing, such as retirement homes, schools or local authorities with 25% of its infrastructure portfolio in this sector
It also runs its commodities strategy in-house in an index strategy and has allocations to energy, raw materials, metals and soft commodities, with a 4.5% allocation to the sector.
Other alternatives include opportunistic investments in credit, Sterte says. “We are looking at opportunities along the entire capital structure, whether it is senior or junior debt or wherever we see we can get the best returns,” he added. Currently, SIM has a 1% allocation to opportunistic capital. The remainder of the fixed income portfolio, 39% of assets, is invested in Swedish fixed income instruments for matching reasons.
However, SIM does not like hedge funds. “We had a portfolio of hedge fund investments five years ago but sold it, which was wise considering the returns for hedge funds since,” Sterte says. He does not regard hedge funds as an asset class but as a set of strategies, and believes SIM itself can access much of what hedge funds do without having to pay the fees. “We have a big balanced portfolio and can add the strategies we want,” he explains.
Overall, SIM’s portfolio returned 7.3% in 2012 compared to 8.7% for the industry, according to statistics from Svensk Försäkring – however, it beat the industry average in each of the previous three previous years.
Apart from fine-tuning SIM’s portfolio, Sterte is worried about the constantly changing regulatory environment, specifically Solvency II.
“This is a bit like shooting at a moving target. We are continuously working with the future in mind and have our own models, and try to anticipate what the capital adequacy requirements will look like,” he says.
He believes the best possible outcome would be if the regulatory framework took into account company risks. “But regulation has other concerns than risk, which can result in the destruction of wealth,” Sterte says. He warns that shoehorning every provider from all the different EU countries, with their own specific circumstances, such as guarantees, under one regulatory framework is unlikely to be ideal for everyone. While he welcomes regulation and risk requirements, he calls for sensible solutions.