Sweden’s $34 Billion Pension Fund Can’t Be Happier Out of Bonds

  • AP7 fund moving more into emerging markets, small cap stocks
  • Says hard to escape rising rates in long duration bonds

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

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

Richard Grottheim

Photographer: Peter Knutson/AP7

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

AP7, one of Sweden’s five state pension funds, has less than 8 percent of its investments in bonds, and holds a very short duration of about two years. Pension funds across the OECD last year held on average more than 50 percent of their portfolios in bonds, according to a study released in June. That’s becoming costly in a world dominated by negative interest rates.

AP7 manages two funds, a 281 billion-krona stock fund and a 23 billion-krona fixed-income fund. Over the past two years, the stock fund has returned 10 percent on average, while the bonds has gained 1.4 percent.

Emerging Markets

It’s now seeking to further boost returns by expanding its stock investments in small companies and emerging markets.

“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.

Other risks, such as Brexit, a U.K. exit from the European Union, or the potential election of outsiders such as Donald J. Trump in the U.S. and Marine le Pen in France, will have limited effects on financial markets, according to Grottheim.

While protectionism and nationalism are risks, they are actually a symptom of globalization, which is benign and good for stocks since it spurs economic growth.

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

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

“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,” he said. “That’s hard to defend against.”

“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.

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