STOCKHOLM - Pension schemes in Sweden likely will boost international stocks and bonds at the expense of domestic securities if voters approve the Sept. 14 referendum to adopt Europe's single currency.
An Aug. 25 Gallup poll indicated 49% of Sweden's citizens were opposed to the currency and 34% joined their government in favor of adoption, but other polls showed more undecided voters inclined to accept the euro, and some said the race is too close to call. Pension experts expect a major shakeup, especially among Sweden's state AP funds, if the vote goes in favor of adopting the euro.
The four schemes that were established in their current form in 2000 to supplement the state pension system have high allocations toward Swedish securities, as much as 41% in the case of AP2, and smaller weightings in the various Europewide market indexes. Sweden's weighting in the Morgan Stanley Capital International Europe index, for instance, is 6%, compared with AP2's allocation of 20% to domestic stocks.
That's led most experts to believe the schemes, with combined assets of some 490 billion Swedish kroner ($57.83 billion), would overhaul their portfolios by making bigger allocations to European stocks and bonds if Sweden chooses to adopt the euro - much as many European Union pension funds revamped their portfolios when the euro was adopted in 1999.
Gareth Derbyshire, a managing director of the pensions strategies group at Morgan Stanley & Co., London, said he definitely expects increased demand for foreign securities and decreased demand for Swedish securities "over time" if Swedes adopt the euro.
According to Morgan Stanley research, institutional investors in Sweden - including pension funds and mutual funds - have 50% of equity portfolios allocated to Swedish stocks, far higher than the 6% in the MSCI Europe index.
The firm expects a "yes" vote to soften demand for Swedish equities as the country's pension schemes - led by the AP funds - move to eurozone indexes that have much lower weightings to Swedish stocks.
Similarly, Morgan Stanley estimated Sweden's country weighting in a eurozone bond index that included Sweden would be 2%.
The upshot: possible opportunities in Sweden for money managers specializing in eurozone equities and bonds.
The 113 billion kroner AP4, for instance, has 19.3% of assets invested in Swedish equities, and 16% in Swedish bonds.
"This is quite a big issue for us. We have done asset-liability studies to see what our portfolio should look like under EMU," said Bjorn Danckwardt-Lilliestrom, head of equities at Stockholm-based AP4. He declined to comment further on the results of the studies or any action taken by the scheme in preparation for a possible "yes" vote.
Executives of AP1, Stockholm, which has substantially less invested in domestic securities (11% in stocks and 10% in bonds), also are worried.
Nadine Viel Lamare, spokeswoman for the 127 billion kroner scheme, said investment officials had modeled the possible effects of adoption of the euro. She declined to elaborate, but said the scheme expects to have to alter its allocation.
"There will have to be changes in the law, as there are restrictions on investment rules at the moment that wouldn't fit if the euro was adopted," she said.
AP1 currently is searching for U.S. small-cap equity managers to run 2.5 billion kroner and Pacific ex-Japan equity managers to run 4.1 billion kroner. They also will be looking for an active European small-cap equity manager; amount unknown. Ms. Lamare declined to provide details.
With 20% in Swedish stocks, AP2, Gothenburg, has the highest domestic stock allocation of the four schemes. The 117 billion kroner fund also makes the most use of external managers out of its peer group.
Scheme spokeswoman Anci Johannisson declined to comment on whether any of the firms would be affected by the move to a single currency, but outside observers suggested Swedish money managers would be the net losers.
"If they did move to a eurozone benchmark, then I'd say that would temper demand for Swedish equities, and in turn, managers of Swedish equities," said one Swedish consultant, who did not wish to be named.
AP2 currently is conducting a search for up 20 active international equity managers to replace passive mandates now being managed by Barclays Global Investors, Merrill Lynch Investment Managers, Pictet International Management Ltd. and MFS Investment Management. The mandates will be appointed along both sector and regional lines.
Pernilla Klein, AP3 spokeswoman, said the scheme had already considered the possible currency change. However, the board didn't think any major revision was needed, she said. n