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AP3 fund buys real assets as markets become riskier

[STOCKHOLM] Sweden's US$34 billion AP3 pension fund is increasing investments in real assets such as infrastructure as bonds and stocks are expected to offer scant returns.

The Third Swedish National Pension Fund holds about 11 per cent of its assets in alternative investments, said Maarten Lindeborg, head of asset management, in an interview on March 26. It "absolutely" sees more deals similar to the purchase of Fortum Oyj's Swedish grid, which it this month bought as part of a group for 6.6 billion euros (US$7.2 billion).

Bonds and stocks "give us the information that future expected returns are going to be lower and that is a big problem for us, other big pension funds and savers," Mr Lindeborg said at AP3's headquarters in Stockholm. "Our main strategy is to get returns where we believe they are more certain."

Central bankers in Sweden and in the euro area have lowered interest rates and unleashed unprecedented stimulus to revive inflation and growth. This has driven bond yields to negative in some countries and caused equity markets to surge, limiting potential future returns. Stockholm's benchmark OMX 30 index is up 14 per cent so far this year, while Sweden's 10-year yields are at about 0.4 per cent.

This could end "badly because if you let this continue you'll have the wrong allocations," he said. "We want to have more alternative investments, which can meet our long-term target but also reduce our correlation to the business cycle." Swedish Bonds AP3 invests in publicly traded shares, fixed-income securities and alternative assets such as real estate, unlisted equities, forests and infrastructure. The fund held 46 per cent in stocks and 38 per cent in fixed-income securities at the end of last year. It returned 13.7 per cent last year, 14.1 per cent in 2013, 10.7 per cent in 2012 and a loss in 2011, according to its website.

The "knee-jerk reaction is to reduce investments in Swedish government bonds because they're down at zero, more or less," said Lindeborg. The fund sees better returns real estate, he said.

AP3 owns 25 per cent of Vasakronan, Sweden's largest real estate company, 85 per cent of property company Hemsoe and all of Trophi, which focuses on real estate for food retailers.

"The income and dividends on those types of buildings are actually quite nice for our target of 4 per cent real return," Mr Lindeborg said. "We have a dream that the economy should come back to pre-2008 levels, which might not be realistic."