The battle over inflation could be prolonged and institutional investors should focus on short-duration assets until central banks are done with rate hikes, said Richard Grottheim, former CEO of AP7, Stockholm, in an interview earlier this month.
"I am not sure that rate movements upwards from central banks are finished, and I think the battle on inflation will be a little tougher than the market thinks. So, I should think the short-term duration assets is obviously something attractive today," he said.
Mr. Grottheim, who left the 900 billion Swedish kronor fund ($83 billion) at the end of May after 23 years to focus on advisory work, said that "all of a sudden fixed-income investments are attractive, which they haven't been for 15 years almost."
"Generally, the market is a little too positive that we will see rate cuts already this year. Because the labor market is still tight and to get the inflation down, probably (central banks) need more tightening or at least need to stay at this level to get (inflation) down to 2%," he added.
Mr. Grottheim had been CEO of AP7, which also manages defined contribution assets, since 2010.
In that time, AP7's assets increased tenfold from roughly 90 billion Swedish kronor, owing to inflows from workplace DC savings and investment performance.
The fund's average annual investment return was 12.6% between 2010 and 2022.
Pal Bergstrom, who was head of large companies and institutions at Swedbank, took over as CEO on June 1.
To help battle the eroding impact of inflation on its portfolio, Mr. Grottheim said AP7 is using equities and a new allocation to private markets, which it is currently building following a reform in Sweden that has allowed the fund to increase its private assets program to 20% over the next 10 years.
For Mr. Grottheim, real assets can offer good inflation protection and investors should not be worried about short-term market movements. "I have been in this business for a long time. Real assets go up and down, and in the long run, they go up. ... I think investors should stick to this plan."
Speaking about allocating to real estate in declining markets, Mr. Grottheim agreed that pension funds can be stabilizers. "That's what we are going to do. We will have a global exposure to real estate. We think as a long-term asset holder, you need to buy in declining markets," he said.
The focus will be on core real estate strategies.
The fund plans to reach a target allocation to alternatives of between 18% to 20%, taking advantage of the maximum percentage of investments allowed, up from the just 4% currently that is only invested private equity.
The fund will target about 9% in private equity, 8% in core real estate and 2% in core infrastructure.
"We have for the time being excluded private credit," he said, to build up skill in real estate investments and infrastructure.
Private credit will be considered at a later stage, he said.
The fund is also mulling partnering with other global investors to invest in real estate, which it recently did with Swedish occupational pension company AMF.
AP7 formed a joint venture with Stockholm-based AMF in May to invest in the city block Urban Escape.
The pension fund owns 33% of the joint venture but has an option to increase its share to 49% during the next 18 months.
Mr. Grottheim said the pension fund will look at other joint ventures with global investors.
"We think that partnering up with investors that have the (skill in private markets) is the way forward," Mr. Grottheim said.
For example, such a partner may be motivated to diminish its exposure and sell some of its assets, he said.
"They can sell it to us," he said, adding that conversations haven't yet commenced.
Speaking about life after AP7, Mr. Grottheim said he plans to take four or five advisory tasks or board roles internationally but remain in the financial services industry.
With a new chairman and new board members, "a year ago, we sat together with a strategic plan for the next five years," he said. "It's a good time to move on," he said.
AP7 is also welcoming a new CIO this year. Lena Fahlen will replace Ingrid Albinsson, who is leaving at the end of July.