Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. PENSION FUNDS
November 28, 2022 12:00 AM

Former head of Sweden's AP3: Liquidity risk needs attention

Sophie Baker
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Kerstin Hessius
    Photo: Peter Phillips
    Kerstin Hessius thinks investors must hone in on liquidity risk and complexity within portfolios.

    Kerstin Hessius is one of the best-known names in European institutional investing, with 18 years at the helm of one of Sweden's largest pension funds.

    As CEO of Swedish national pension fund AP3, Stockholm — a role she relinquished on Oct. 31 — Ms. Hessius was at the helm of 464.9 billion Swedish kronor ($45.6 billion) in assets as of June 30 and kept the ship steady amid reform proposals and turbulent markets.

    Speaking in a fireside chat at the Pensions & Investments WorldPensionSummit in The Hague on Nov. 3, Ms. Hessius — who will take some time off before embarking upon a portfolio career — said two concerns weighing on her mind right now have been spotlighted by liability-driven investment news coming out of the U.K.

    As a result of the LDI-induced meltdown in the U.K. government bond market in September, pension fund executives have to focus more on two risks: "One is the risk of building very complex products, and the other risk is liquidity risk," she said.

    Long-term investors are "not focused enough on liquidity risks" — which Ms. Hessius believes will be one of the "biggest risks we have in front of us" due to the challenging environment of an end to unconventional monetary policy, geopolitical risks and inflation risk.

    Liquidity risk already reared its head in 2020 at the onset of the COVID-19 crisis — a point at which AP3 executives "started to focus quite a lot in our crisis management on liquidity risk. The risk is that we underestimate risk that is not priced during normal circumstances — especially if you are a long-only fund," Ms. Hessius said.

    Another risk is around asset allocation and the issue of the denominator effect: With public market returns pulling down exposures, many pension funds have found their private markets allocations to be at all-time highs.

    "What we have seen this year is that our alternative portfolio has increased substantially because (of) what's happening in the liquid markets and it's quite unique that both fixed income and the equity portfolio fall at the same time so much," she said.

    In the first half of the year, AP3's alternatives exposure rose to 34.1% as of June 30 from 28.8% as of Dec. 31.

    That increase has come "with almost no investments," Ms. Hessius said. "And I think most of the pension funds that are quite big in alternatives have seen something in the same (vein) — and the question is, 'How much you are prepared to invest in alternatives when … you have to think about liquidity in your portfolio?'"

    AP3 has about 40% of its portfolio invested in listed equities and the remainder in fixed-income assets. The fund is one of six Swedish state pension funds that, during Ms. Hessius' tenure, have been the subject of reform proposals by the government, including a merger — a suggestion that was ultimately dropped. Four of the funds — including AP3 — are tasked with achieving high returns over the long term. Each has different asset allocations to reach their aim.

    Related Article
    Liquidity crunch tops institutional investors' greatest tail risks
    Biggest asset class

    Among its alternatives exposure, real estate is AP3's biggest asset class, accounting for about 55% of the alternatives allocation and almost 20% of the overall portfolio.

    And AP3 invests in real estate in a different way than other pension funds, Ms. Hessius explained. The fund's real estate strategy is to focus on domestic companies and to take large equity stakes in each one. The real estate portfolio is composed of five firms: Vasakronan AB — which Ms. Hessius said is the largest of its exposures; Hemso Fastighets AB; Trophi Fastighets AB; Fastighets AB Regio; and Trenum AB.

    Taking a large equity interest means AP3 executives can really get involved with the companies and help to direct them.

    "You can really get them much more professional, and … we can handle the risk within the company," Ms. Hessius said.

    Its method of real estate investing means AP3 can direct the companies to new housing or building opportunities and can advise on when they think prices in the market are high.

    It is also an example of AP3's sustainability focus — in particular on governance. As such, AP3 focuses on building sustainability into a company's whole business chain. Vasakronan is a good example of that, she said.

    "They are one of Europe's most sustainable real estate companies and (they have put) sustainability into the whole business chain, from construction to finance," she said, adding that the company has been "a role model for the whole sector."

    However, Ms. Hessius does have concerns over pension funds being forced to put too much focus on key performance indicators in sustainability.

    She also thinks investors "should be very picky" when it comes to the primary green-bond market. AP3 began investing in green bonds in 2006 and had increased its holdings to 23 billion kronor as of Dec. 31.

    The fund aims to have at least 30 billion kronor, or about $2.9 billion, invested in green bonds by 2025, according to its 2021 stewardship report.

    "We are very picky in green bonds," she said, adding that it's important for the investment industry "to be very tough on criteria" related to greenwashing.

    Related Article
    Ninety One CEO sees liquidity as the next big thing (again)
    Handover period

    Ms. Hessius is now in the process of handing over the reins at AP3 to Staffan Hansen, who was CEO of SPP Pension & Forsakring, Stockholm.

    She's leaving the pension fund is good shape, despite a challenging start to the year.

    AP3 returned -7% in the first half of 2022 — generating 5.6 percentage points in outperformance vs. its long-term static portfolio benchmark, which comprises listed equities and fixed-income securities — and has achieved an average annualized return of 8.5% over the five years ended June 30 and 9.9% over the past 10 years.

    That followed a 20.7% return for the calendar year 2021.

    Under its mandate, which is to manage assets that will be drawn upon in the event of deficits in Sweden's national pension system, AP3 also paid 2 billion kronor in capital to the Swedish Pensions Agency in the first half of the year. That capital was used to help cover the difference between contributions and benefits paid out in the country's retirement system.

    Asked about the advice she would leave for Mr. Hansen, Ms. Hessius highlighted the power and responsibility — as well as the prestige — that comes with running billions of assets on behalf of Sweden's citizens.

    "You will become a distinct and credible leader if you can show long-run perspective, in word and deed. You will attract both competence and business. And … that is so unique and you can avoid opportunism. You can be a contrarian investor. However, the long-term perspective sometimes makes you controversial in your views in ESG," she said.

    Mr. Hansen also has a "platform where you can sometimes get into debate and really get the debate a little bit more … nuanced and balanced. And I think this position is so unique," Ms. Hessius added.

    Related Articles
    Sweden's AP3 names new CEO
    USS 'far less affected' by LDI-related liquidity squeeze than other U.K. plans
    Recommended for You
    oil sands alberta 1550_i.jpg
    N.Y. State Teachers pension fund keeps investments in oil sands companies
    pbgc_sign_1550-main_i.jpg
    PBGC approves $74 million in aid for 2 struggling multiemployer plans
    New York State Flag Blackboard Teachers_i.jpg
    N.Y. State Teachers sticks with Callan as investment consultant and group of asset managers
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing