Wassum's Annelie Enquist said investment limits will mute the reallocation's short-term impact.
STOCKHOLM - At least 56 billion Swedish kroner ($5.8 billion) will be up for grabs over the next two years as Sweden's revamped National Pension Funds are required to hand over 10% or more of fund assets to external money managers.
Global equities and global non-government bonds are likely to be the most common mandates awarded to external managers as each of the four Allmanna Pensioenfondens restructures its asset allocation.
The four new funds, AP1 through AP4, were formed in January with 140 billion kroner in assets each and an initial asset mix of 30% equities and 70% Swedish government bonds. Each fund is independent and all will compete for the best returns, even though the assets they manage are all from the Swedish state pension system.
PPM revamp
The four defined benefit funds were revamped to accommodate launch of the Premium Pensions Myndigheten, a compulsory defined contribution plan set up last summer. Prior to the launch of the PPM, the AP consisted of six funds that jointly managed around 740 billion kroner.
Each of the four AP funds has until the end of 2002 to appoint external managers.
All of the funds have completed asset-liability studies, but officials are tightlipped about the strategic asset allocations.
The secrecy is in part because the funds now are competitors, but mostly because the changes to each fund's asset allocation will have a massive impact on Sweden's domestic investment market, said Bjorn Franzon, deputy managing director at AP4. Before the restructuring, almost 90% of the old AP4's total assets, 160 billion kroner at the end of August, had been invested in Swedish equities.
The other three funds were primarily invested in fixed income.
The short-term impact of this reallocation will be muted, however, as the Swedish government has put limits on non-domestic investments, said Annelie Enquist, senior consultant at Wassum Investment Consulting, Stockholm, which is not connected with the funds. Only a maximum of 15% of fund assets can be invested in non-domestic markets during 2001. The cap on non-domestic investments will be raised by five percentage points every year until 2006 when the exposure to non-domestic assets will reach 40% of total assets.
Finalizing allocation
AP4 officials plan to appoint external managers over the next year, but are finalizing the strategic asset allocation, said Mr. Franzon.
"It's no secret to say that there will be a flow of money from Swedish fixed income to foreign equities," he said, refusing to elaborate.
AP1 is likely to raise its exposure to equities and would be looking for external managers in the future, said Bo Ljunglof, chief investment officer. But the fund is not looking for managers at the moment, he added.
AP2 - which is based in Goteborg, unlike the other three, which are in Stockholm - and AP3 have both appointed teams of external managers, most of which are passive. These recent appointments seemed to be short-term holding positions while each fund adjusted its strategic asset allocation, said Ms. Enquist.
But it's possible the funds will adopt a core/passive and satellite/ active strategy and appoint active managers for non-domestic assets as the restrictions on those assets are lifted over the next few years.
AP3 plans to look for active equity managers this year, but spokeswoman Pernilla Klein said fund officials are still deciding which asset classes would be suitable for active management.
"Generally, we intend to build a portfolio of active mandates," she said, but would not go into further detail.
Last month AP1 appointed Barclays Global Investors Ltd., London, to manage a passive global equity portfolio but Mr. Ljunglof refused to say how large the mandate was. The fund also has hired BlackRock Inc., New York, for a U.S. non-government bond portfolio; Mr. Ljunglof wouldn't give the size.
The rest of the new AP1's assets of 140 billion kroner are managed in-house. Citibank remains the fund's global custodian.
BlackRock had managed assets for the old AP1, AP2 and AP3 funds, which, prior to the restructuring, were pooled into a 650 billion kroner fund invested in fixed income and property only.
Seven external managers
Late last year AP2 appointed seven external managers: SEB Investment Management, Carlson Investment Management, Carnegie Asset Management and Alfred Berg Fondsvorvaltning, all of Stockholm; State Street Global Advisors, London; Merrill Lynch Investment Managers, London; and BGI.
Six other firms were short listed, and could be award allocations this year: Lansforsakringar Wasa, Stockholm; Handelsbanken Kapitalforvaltning AB, Stockholm; ABN Amro Asset Management Ltd., Dresdner RCM Global Investors and Pictet Asset Management U.K. Ltd., all of London; and MFS Institutional Advisors, Boston
AP3, meanwhile, recently appointed Northern Trust as its sole custodian. Its passive managers are: Merrill Lynch for U.S. equities and SSgA for Japanese and European equities. The fund has drawn up an asset management agreement with BGI but has not yet allocated assets to the firm,
Watson Wyatt advised.
AP3 is likely to continue to run domestic and European equities and fixed-income mandates in-house. The management of non-European equities and fixed income are most likely to be outsourced.
"Equities outside of Europe are clearly not our specialty," said AP3 spokeswoman Ms. Klein.
