It’s Happy Time Being out of Bonds for Sweden’s $34 Billion Pension Fund

Sweden’s 300 billion-krona ($34 billion) AP7 fund, can to a large extent stay away from the bond markets unlike many pension investors.

Richard Grottheim, it’s manager, is remarkably positive. Grottheim says it will likely all work out fine even as central banks are greasing financial markets with ever more free cash and as political risk mounts in Europe and the U.S. At least if you’re looking 40 years ahead.

“One can talk about how long-term potential growth and profit development in the world are affected by the things we’re seeing now. It’s hard to see how the outlook has fundamentally changed even though there are, of course, a number of short-term risks,” he said in an interview.

Holding a very short duration of about two years, AP7, one of Sweden’s five state pension funds, has less than 8 percent of its investments in bonds. According to a study released in June, on an average, more than 50 percent of their portfolios in bonds were kept by pension funds across the OECD last year. And in a world dominated by negative interest rates that is becoming costly.

A 23 billion-krona fixed-income fund and a 281 billion-krona stock fund are the two funds that are managed by AP7. While the bonds have gained 1.4 percent, the stock fund has returned 10 percent on average over the past two years.

By expanding its stock investments in small companies and emerging markets, it’s now seeking to further boost returns.

“When emerging markets grow, new markets are created for companies and that’s good for profits,” Grottheim said.

“The pace of Chinese growth has slowed, yes, but that may not just be negative” since “Chinese politicians are pretty clear about that they want a consumption-led economy, which is good for the world,” he said.

According to Grottheim, limited effects on financial markets would be had for other risks, such as the potential election of outsiders such as Donald J. Trump in the U.S. and Marine le Pen in France. Or Brexit, a U.K. exit from the European Union.

Protectionism and nationalism are actually a symptom of globalization, which is benign and good for stocks since it spurs economic growth even as these two issues are risks.

“One reason why it’s hard to push up inflation is that we have an incredible excess supply of labor around the world. That’s good, but egotistically for us, it’s a pressure that boosts the political forces that we’re seeing today,” he said.

He also said that for pension companies with larger chunks of bonds in their portfolios, low interest rates are also a challenge.

“When it comes to the interest rate portfolio what one is most worried about is the day when interest rates start moving up, especially at the long end of the yield curve. That’s hard to defend against,” he said.

“I would be worried if I had a 40/60 portfolio of interest rates and stocks and have a long duration because that’s clearly hard to escape” when rates rise, he said.

(Adapted from Bloomberg)



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