The Nordic Region: Sweden Home bias wanes
Pirkko Juntunen finds that competition reasons may sway domestic allocations among life and pension companies
Despite all the arguments for diversification, pension funds across the globe seem to adhere to Dorothy's mantra in the Wizard of Oz: ‘There's no place like home'. The main justification is that home country investments are a good hedge for liabilities. Then there are currency risks. And of course there is also good old-fashioned herd mentality.
However, in smaller markets such a Sweden's, where a handful of large companies such as Ericsson, Hennes & Mauritz, Nordea, and TeliaSonera make up nearly 50% of the index, home bias potentially constrains the investors' overall risk/return opportunities. "The wise man puts all his eggs in one basket and watches the basket," as Andrew Carnegie put it. Maybe - but it could also make you miss the bigger chickens laying bigger eggs elsewhere.
In Sweden, pension and life companies have over the years been reducing their home bias on the equity side in particular. Gustav Karner, head of asset management and CFO of Länsförsäkringar, with assets under management of around €20bn, says the company had reduced its exposure to Sweden from 50% of its equity portfolio 10 years ago to 10%, and over time expects a more neutral weighting. "Considering the low weighting of Sweden in the world indices it is difficult to justify a higher weighting," he says. He also points out that allocation decisions are taken with the overall portfolio efficiency in mind. "Our exposure to emerging markets and Asia has increased over the years as a consequence of that." Still, going lower than 10% might result in a competitive disadvantage: "Should we deviate too much from our competitors' portfolios it would be difficult to market ourselves in Sweden," he says.
Furthermore, the fact that Länsförsäkringar is an index manager in its equity portfolio nullifies the notion that local fund managers have deeper knowledge of their home markets. By contrast Länsförsäkringar's bond portfolio is actively managed by Alfred Berg, and Karner says that the home bias there is justified by the fact that the fund managers are close to the market and have an information advantage, not to mention that it offers a good liability-hedge and zero currency risk.
Allocation to asset classes such as private equity (see box) and forestry have a Swedish element but Karner says these are justified because of the opportunities within Sweden, the talent available and Länsförsäkringar's ability to research managers. Contrast infrastructure, which he points out is entirely international because of the lack of opportunities in Sweden. He also stresses that Länsföräkringar does not have any non-deliberate currency exposure. "Any exposure we have is an active decision, otherwise we hedge all currency exposure, which may be a different approach to our competitors," he says.
Mats Andersson, CEO of AP4, one of the Swedish national buffer funds, with assets of SEK1bn, says that the AP funds have, for historic and regulatory reasons, an extreme home bias. On the equity side one-third is invested in Sweden. This goes against all the portfolio theories, Andersson concedes. "I joined AP4 in October 2007 and inherited these positions and thought a lot about it," he recalls. "However, having a home-market bias has been positive for us because historically the Swedish stock market has performed better than the MSCI World." He observes that the AP funds can own up to 2% of the Swedish stock market and currently hold approximately 1%, so they could theoretically double their investment; but while historic performance would have justified that - since 2001 Sweden has outperformed the rest of the world by 40% - it is, of course, no guarantee for the future.
The AP funds have a 40% restriction on foreign currency exposure, so higher equity exposure would require hedging and therefore push up costs. Andersson says that, in general, he is comfortable with the current exposure because the Swedish index has a broad range of sectors and sizes of companies: AP4's allocation is much broader than that of the MSCI Sweden index, and smaller companies have also outperformed.
"We are traditionalists," he says. "We have a comparatively high home-market bias but
this has been positive for our returns and we also have a lower allocation to alternatives.
As the past few years have proven, diversification does not always work, and costs often
outdo the performance."
Hans Sterte, CIO of Skandia Liv, with assets of SEK292bn (€31bn), says that while the firm's fixed income assets have more of a home country bias to match liabilities, equity exposure is broad, with 40% of total assets, of which 13% is invested in Sweden. Like Andersson, Sterte also argues that the Swedish market gives a broad exposure to several types of companies and sectors - and, indeed, other economies. "The largest Swedish companies have a large proportion of their activities abroad and export-related companies also give a global market exposure," he says. The risk level in the portfolio is adjusted so that its exposure to Sweden does not push up the overall risk too high. "We make sure that our asset classes are complimentary and work well together."
Sterte says that Skandia is continuously working with diversification and continues to increase its emerging markets exposure. Out of Skandia's total assets, 8% is invested in emerging markets. However, again like Andersson he agrees that diversification for the sake of diversification can easily end up spreading your capital too thinly over too many assets classes - increasing costs rather than returns.
So it seems that although Swedish institutional investors are watching their baskets with domestic eggs they are also increasingly eyeing those further afield.