PP Pension: Steady as she goes
The €796m PP Pension fund is known for consistently producing excellent returns. But after a recent dip in performance, the newly appointed CEO Viveka Ekberg (pictured) and CIO Cecelia Thomasson Blomquist aim to re-establish the fund’s good returns without compromising on its winning philosophy, writes Pirkko Juntunen
Sweden’s PP Pension, formerly Pressens Pensionskassa, is well-known in the pensions industry for stellar returns at times when others around the world were not so successful. The fund, created in 1882 to secure income and pensions for journalists and their families, has had a dynamic asset allocation strategy, often innovative and contrarian, which has worked well over the decades. In 2008 the fund did experience a drop in performance of 3.2%, although this still compares well with the average loss of 20% in 2008, among pension funds within the OECD. At the beginning of 2009, PP Pension lost money in a hedge fund debacle and underwent a change in leadership. These events have not left the fund in a state of gloom though, but full of optimism for the coming years, both regarding asset management and the overall insurance business, covering both occupational and private pension products.
Following the retirement of Tomas Lindstrand at the beginning of 2009, Viveka Ekberg, joined as CEO in February and subsequently recruited Cecilia Thomasson Blomquist as CIO. She started in August. Ekberg and Thomasson Blomquist’s two decades of experience in the financial industry has helped pull the fund back into black following the losses of 2008.
Having joined the media fund, Ekberg has done a full-circle, in that she first started as a financial journalist in the mid-1980s and is now managing journalists’ pensions. Following her stint as a journalist, she worked for the majority of her career at leading Swedish asset management companies, first as an analyst and strategist and later as head of SEB institutional asset management, a role she took on in 1997. In 2000 she joined Brummer & Partners, the hedge fund provider, and during her seven years there she was on several of the company’s fund boards. Most recently she was head of Morgan Stanley Investment Management’s Nordic operations.
Thomasson Blomquist has worked at AP1, one of the Swedish national pension funds, for the past 11 years. She was part of the pre-2000 structure of AP Fonden 1-3 as it was called, where she was head of currency and treasury, part of the management team and was most recently increasingly involved in asset allocation. Earlier in her career she worked as a currency and bond trader. Thomasson Blomquist’s experience in asset allocation will come in handy, particularly at a time when pension funds are learning how much asset allocation actually affects returns. This has been one of the saving graces for PP Pension’s performance over the past two years.
The fund’s trust in dynamic asset allocation, and swift reactions as markets fluctuate, paid off during the recent crisis. During his leadership, Lindstrand had the foresight to get out of equities early, which contributed to maintaining the fund’s strong track record. Thanks to its diversified portfolio, including a large chunk in domestic residential property, the fund has had some of the best returns in the Swedish market, averaging 7.5% annually over the 10-year period. The fund began cutting its equity exposure in 2007 when cracks in the global wbanking system became apparent, and subsequently sold off its entire international bond exposure. At the end of 2007 it had over 31% invested in equities, which had been cut to 16% by the end of 2008. At one point during 2008 the fund held 15% in cash.
Dynamic asset allocation and risk management continues to be part of the strategy and the investment philosophy is based on a robust, well-diversified portfolio. “We aim to never be at the bottom of performance tables, perhaps never achieving the top position either, but having a steady, positive performance over time,” Ekberg explains. “This is a wonderful strategy and it has worked very well for PP Pension over the years,” she says.
As the market rebounded during the spring of 2009, PP Pension started adding equities and by the end of August 2009 it had almost 31% in equities, back up at 2007 levels.
The fund has historically been, and continues to be, invested in domestic and global equities, fixed income, direct domestic residential property and hedge funds.
PP Pension’s hedge fund investments went through a rough patch last year when it got caught up in the Weavering Capital scandal, often called the Madoff debacle of Sweden. Neither Ekberg nor Thomasson Blomquist had started at PP Pension when the investment decision was made but it was one of Ekberg’s first tasks as the new CEO to explain it to members and the media.
Weavering was set up by Magnus Peterson, a Swede and a former head of trading at SEB, the Swedish banking group. He called in administrators in March 2009 and the firm’s Macro Fixed Income fund was put into liquidation in the Cayman Islands after claims could not be paid. It is not yet clear exactly what went wrong and lawyers are still working on the case. It remains unclear whether investors will be able to retrieve assets.
PP Pension invested SEK65m (€6.4m) with Weavering in the spring of 2008 and at the end of February 2009 that investment was valued at SEK102m, or just over 1% of PP Pension’s total assets. Investment consultant Wassum advised the fund on the investment and at least five of Wassum’s clients lost more than SEK325m as a result. As expected, Weavering had a negative effect on PP Pension’s first-half performance, keeping the fund in the red at -0.7%. Hedge funds returned -11.7%, but without Weavering, the rest of PP Pension’s hedge fund investments returned 4.6%.
Ekberg notes that Weavering is no excuse not to invest in hedge funds, it merely proves the importance of in-depth research and that not even well-known auditors and advisers can always be trusted. As a result of the Weavering debacle PP Pension has terminated Wassum as an adviser for hedge fund investments.
PP Pension’s equity investments are focused on large-cap, global equity mandates and during 2009 a decision was taken to move a portion of the money to passive mandates. Thomasson Blomquist says the fund aims to find the right balance between active and passive management as she believes that adding a passive element will create more stable returns for the long term. She declines to specify the percentage in passive assets but says that a large proportion of the additional equity allocation since the beginning of 2009 has been invested passively.
Another unique trait of PP Pension is its high domestic property allocation, which continues to serve the fund well. The property allocation has been stable around 25-30% for several years and is mainly invested in Stockholm and Malmö, Sweden’s third largest city, because of the positive demographic outlook. PP Pension does not invest via funds of funds because of the costs involved and also because it means being one step further away from liquidity, Ekberg says. She also emphasises that the fund is unlikely to invest outside of Sweden.
Having sold its international bond exposure, the fund now only invests in Swedish fixed income because its liabilities are in Swedish krona, Thomasson Blomquist explains. The long-term liabilities carried by pension funds create a mismatch because of the lack of depth in the Swedish long-term government bond market. Thomasson Blomquist says it has sometimes bought protection for long-term interest risk using swaptions. At times, PP Pension has had to act outside the Swedish markets, using euro swaptions hedged back into Swedish krona.
The overlay programme has also been a positive contributor to performance. The value of the swaptions increased and served as a hedge against growing liabilities during the falling interest rate environment in 2008. In the autumn of 2008 the Swedish supervisory authority, Finansinpektionen, introduced a new accounting measure to discount liabilities. Under this new system pension funds and insurance companies can include mortgage bonds in addition to the long-term government bond-rate to determine what discount rate to use in calculating liabilities. This helped to dampen the rise in pension fund liabilities during a critical period in the credit crisis.
Like many of their colleagues, the staff at PP Pension are equally concerned with cost as with performance. Both Ekberg and Thomasson Blomquist say it is vital to continue developing and improving rather than resting on past laurels.
The 25-strong team at PP Pension is busier than ever following the overhaul of the second pillar industry-wide pension system, the ITP plan, in 2007. Currently, the majority of the fund’s assets are linked to defined benefit (DB) plans but as a result of the ITP reform an increasing portion of pensions are linked to defined contribution (DC) plans. The media fund now has a fund platform and offers both occupational and private pension products as well as insurance, among other services. DC members are offered a default solution inspired by some of the core ideas from the well-diversified DB portfolio, but DC members can also make an active investment selection and are able to put up to 50% of their pension savings in PP Pension’s fund platform.
The platform has 25 options and the fund managers represented are among the asset management firms used for managing PP Pension’s DB assets. The firms include both local and international companies such as Swedbank, Catella, Lannebo, Simplicity, Carlson as well as Vanguard, Carnegie, Gartmore, Skagen, BlackRock, First State and Fidelity.
PP Pension divides the funds on its platform into alpha and beta funds according to region and shows ratings prepared by two external agencies. “We will change the funds available if we find better performers,” Thomasson Blomquist says. The basis of the fund platform is to make it “easy to make the correct choice”, with clear-cut distinctions between the funds, and not offering hundreds from which to choose. “We have a great focus on helping the individual to make the right choice,” she explains.
Contrary to the direction taken by some of the large Swedish occupational pension providers, PP Pension is very focused on offering advice and help to its members. “We offer our clients both direct access to our very experienced insurance advisers and to our client services team, but we also use our website extensively to provide input on important pension-related issues. We’ve also founded the website www.mediesverige.se, which covers a range of interesting issues, not only pensions, for people who work in and around the media industry to become even more relevant as a service provider for our members,” Ekberg notes.
PP Pension is one of very few remaining smaller players within the ITP system, which is dominated by banks and insurers. However, PP Pension is able to offer these services both to its members and the wider general public on competitive terms. Ekberg believes that the company’s status as a mutual insurance association is a great advantage, where the original 19th century idea of a group working together towards the common goal of securing old-age pensions, rather than pleasing a shareholder, is never forgotten. “PP Pension has managed to remain efficient and flexible in a fast changing market place. Thanks to our mutual status we can pass these efficiency gains on to our members, through better terms,” she says. “Furthermore, the large pension insurers often have large administrations and tend to be less manoeuverable suffering from diseconomies of scale” Ekberg notes.
Ekberg also says competitive pressure is increasing, and one of the challenges is to keep ahead of the curve and continue trusting the philosophy that has kept PP Pension thriving throughout its 128-year history.
Ekberg and Thomasson Blomquist may be new at PP Pension but they are by no means new to the industry and their experience in asset management and pensions management gives them at better chance than most to match, and possibly better, Lindstrand’s impressive performance record.