This has been the year of the consolidation of the recent reforms in the Swedish pension system. Both the PPM system, through which part of individuals’ social security contributions are directed to mutual funds, and the restructured AP social security buffer funds are up and running, making the Swedish market now one of the most dynamic in Europe.
In fact, the new structure of the market has been marred by poor performance and disappointment, but the general opinion among investment professionals involved is that better days will soon come.
According to figures at the end of June, AP funds have lost a total of SKr17.4bn (e1.4bn), since the initial transition of assets to the selected managers at the beginning of the year, with AP1, AP2, AP3 and AP4 being given SKr134bn to manage. The worst results were obtained by AP1, which recorded losses of –4.1%, or SKr5.9bn. AP2 lost SKr4bn, AP3 SKr5.6bn and AP4 SKr1bn.
Also disappointing was the second round of fund selection for the PPM system, where less than 30% of the total 500,000 new contributors to the system made an active selection of funds, meaning that their contributions go into the default AP7 fund. However, the fact that more than half of these contributors are in the 18–27 age group, means PPM will concentrate its educational efforts to convince investors of the importance of an active investment choice.
Despite these discouraging figures, the PPM is still considered a success that will involve 100,000 new contributors a year. Asset managers are focused on developing products to attract new members.
The changes in the pension system are altering the shape of investment management in Sweden, long characterised by a high concentration of assets in the hands of the large domestic insurers and banks. Now, it is opening up to international houses.
Foreign interest in the Swedish market is nothing new. The tradition among Swedes of using mutual funds has long attracted international managers into the country. Recent developments have accelerated this trend.
On the institutional side, competition is tough, and asset allocation strategies still benefit local players. The average institutional portfolio is still strongly biased to the domestic market and, although pension funds are going global, around 50% of their assets are still invested in Sweden.
“In terms of fixed income investment, for instance, there is a need for greater diversification,” says Carina Lundberg, marketing director at the investment department of major insurer Folksam in Stockholm. “The Swedish bond market is small and it is very difficult to find issues here. Knowledge of the euro bond market is not that high, but people know it is necessary to diversify, so the interest in fixed income investments in Euroland is now higher than before.”
On the equity side, declining markets have forced insurance companies to reduce their equity exposure to meet the returns standards required by law. “This tendency has escalated in the last couple of months,” she says. “But in general I would say that institutional investors are now calmer than they were during the 1997 crash. Today, we work more systematically with risk and it is easier to handle situations like this.”
This relative calm has prevented to some extent large shifts from equities, but taxation has also played a major role in keeping institutions investing in stocks since those selling equity have to pay a significant tax. “Currently, changing funds and getting rid of equity is expensive so investors prefer to wait and see what happens in the market during the following months,” Lundberg says.
This obviously has an impact on market development, limiting opportunities for other competitors, but in terms of investment strategies it may help investors in the long term – at least preventing them selling at a time when some believe they should be buying.
But current market performance is not the only reason behind the restructuring of institutional portfolios. Swedes have long needed to implement more global asset allocation by moving away from traditional investment strategies.
“Institutional clients are changing their investment strategies,” says Sverker Lindström, managing director of portfolio management firm Bohman & Lindström Investment Services in Stockholm. “Investors are trying to implement new portfolio structures to improve their position,” he says. “And this is also affecting the asset management industry. Firms are merging because they want to be stronger and expand their capabilities to respond the demand from clients.”
Issues like internationalisation, high-yield investments, private equity and hedge funds and passive investment, are slowly finding their place in institutional portfolios.
“Strategies like using hedge funds in the portfolios are gaining importance,” says Lindström. “They are not a dirty word any longer and because they are performing quite well, people want to have some exposure to this asset class and other low correlated investments.”
This trend is giving foreign managers a chance in the market, as most providers of specialist investments are coming from outside.
“Swedish investors are very open- minded and are welcoming foreign managers,” says Fredrik Marell, account manager at Intervalor in Stockholm. Intervalor is an integrated marketing company representing international asset managers in the Nordic region. At present it represents Invesco, Massachussetts Financial Services (MFS), F&C, Scottish Widows and Liberty Ermitage.
“Although the market is open to foreigners, it is a different market and you have to know it very well to do business here. And this is our role, to facilitate these companies entering the market.
“From the start of this year we have seen a tremendous interest in alternative asset classes and investors want to know more about them,” he says. “Among pension funds we have seen an increasing interest in investing for instance in alternatives and corporate bonds, and, even though there are many and very good asset managers in Sweden, not all have the specific knowledge necessary to manage this type of investments. So investors are open to specialists coming from outside.”
Although the portfolios of Swedish institutions are opening up to new asset classes and new providers, a large proportion of the market still uses balanced mandates with a very strong Swedish component. “To have access to this part of the market you have to have local presence and management capabilities for Swedish equities and fixed income, so in this area we don’t see much competition from foreign players,” says Torgny Krook, head of institutional clients at Nordea Investment Management in Stockholm. “It is important for the Swedish market to continue to see more foreign providers. They already have a significant presence in the retail and individual pensions market via the PPM system. And on the institutional side they are competing for non-Swedish specialist mandates.”
According to figures from Nordea, the overall institutional market has assets of SKr900bn (e100bn). But taking into account that a large proportion of that total is managed in-house by insurers, the real market for external asset managers represents only around SKr400bn, mostly managed through segregated accounts
In terms of asset allocation, SKr500bn of the total SKr 900bn is invested in equities, and the rest in fixed income.
The Swedish insurance companies have set their own asset management divisions and the proportion of assets they outsource is still marginal.
Covering around 2m blue-collar workers, AMF Pension is the largest pension scheme in terms of members in Sweden and a good example of in-house management. It manages SKr200bn and is not planning to give these assets away.
“We have our in-house asset management division and our investment philosophy has proved to be very successful throughout the years,” says Tor Marthin, chief investment officer at AMF Pension in Stockholm.
“The reason why we are not planning to outsource a proportion of our assets to external managers is because we have been successful with our method, and as long as this works, I don’t see the need for considering other solutions,” Marthin says.
“If you compared our returns with the other big insurance groups you would see we have been at the top during the last years, and we have done this in a very cost-effective way,” he adds.
The cost of the management of the assets is 5 basis points per year, “and there is no one who can offer us that”. “People offer to manage our money constantly, almost daily, and it is something that we might consider in the future, but not now.”
“Institutional money in Sweden is up to a certain extent locked in,” says P O Öst, head of institutional marketing at Carlson in Stockholm. “And also, I think the turmoil we are seeing in the market at present will also affect the number of new mandates being awarded, so even though the Swedish pension industry is a growth market, we are not seeing much money coming into the market at present.”
He continues: “The growth will come from outsourcing from those who are still doing everything in-house because I don’t see many new pension funds being created from scratch, and I don’t see many companies externalising the assets they keep in the book reserve system through a pension fund.
“I have waited for a long time to see companies to go the Anglo-Saxon route but this is not happening at the scale or speed I perceived,” Öst says.
The main reason behind this is the existence of an insurance solution, the ITP pension scheme, based on a collective agreement between the Swedish Employer Confederation and the trade unions, that covers salaried employees within the private sector. The ITP scheme is managed by Alecta, formerly SPP, and has now around SKr350bn under management. This has effectively ‘locked’ money in by using a premium system to encourage members to stay in the scheme.
Book reserved pensions accounted for around SKr80bn a couple of years ago, and although some large companies have decided to externalise these assets, a large majority haven’t done so. “Everybody is aware of the possibilities of doing this, but at present this is not considered as priority for these corporations,” Ost says.
Another hot issue in terms of approach to investment is the growth of awareness about socially responsible investments (SRI) and sustainability. Swedes, and the other Nordics, have always been at the forefront of any developments regarding environmental, social and ethical policies, and this sensitivity has now hit the investment arena.
Earlier this summer, the PPM default fund, AP7,decided to blacklist 30 companies from its equity portfolio based on their environmental and social records. Although the fund does not exclude tobacco, alcohol or firearms – on the grounds that a lot of people smoke and drink and that the Swedish government is involved in arms manufacturing and trading – it has screened out companies whose behaviour ranges from discrimination against women to manufacture of landmines. This move has increased the already significant presence of SRI investments in the market.
“SRI is becoming more important in the market and whether a manager looks at these issues or not can be an important criteria when it comes to manager selection,” says Lundberg at Folksam. “Some managers have made clear they are not planning to take SRI into consideration within their investment strategy but this is not our approach,” she adds. “We are taking SRI very seriously and we’ll be launching soon a new set of investment criteria that looks at human rights.”
At Carlson, Ost says: “Sustainable investment has been around for a number of years, much longer than foreign equities or alternative investment. The fact that PPM’s default fund is looking at this is very important.” Carlson has its own research team and database looking focusing on sustainability. “We have both mutual funds and segregated accounts looking at these issues and we can tailor-made a mandate including client specific requirements.”
The general view on the market is positive. Managers and investors hope to see the market stabilising during this year and the focus for the near future will be diversification and risk control. More and more institutional are undertaking asset liability studies to established specific benchmarks and improve asset allocations, and the consultancy industry hopes to their business grow.
Local firms such as Wassum and Bohman & Lindström, and international houses with presence in the market, are expanding their investment consulting capabilities, and the performance of the market, might be helping them in gaining clients.
“When everything is going well and the returns are good no one cares too much about consultants. I think that was one of the reasons why some firms left the market and are now working from London or elsewhere,” says Lindstrom. “We need another year or two to see investment consulting grow in Sweden, but we definitely are seeing an increased interest in our services because we do provide added value.”

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