By Hamlin Lovell, NordicInvestor
This article is a part of our 2021 Nordic Insurance Report. The full report can be found here
Sweden’s PRI (which has no relationship with the UN PRI!) provides credit insurance and other services for Swedish company pension schemes. In the event of rare defaults (such as Saab in 2011 it pays the full liability for occupational pensions to Alecta (which Nordic Investor has also interviewed here)
Nordic nvestor interviewed PRI Head of Alternative Investments, Peter Ragnarsson.
The Pandemic: Remote Working, Volatility and New Manager Engagement
Team communication suffered and manual paperwork was cumbersome;
“Personally, it was beneficial to avoid commuting and have more flexibility, but I missed the daily interactions with colleagues and internal discussions. It is easier to talk to people in the office”.
“As a small nimbler organization, we have always been able to make investment decisions quickly, but the industry was also not prepared for remote working in terms of paperwork for KYC or subscribing to new funds. This often still requires physical signatures on subscription documents, KYC forms, and tax forms, which sometimes even need to be faxed to administrators. Some firms are now accepting digital signatures”.
Outsourced remote operational due diligence worked well;
“I have always had somewhat of an open door policy and taken a lot of meetings with external managers. That helped me a lot with a large network to build from and to keep in contact with when working remotely. External manager monitoring went okay but I missed out on the site visits to managers, and most new allocations were with existing managers. Our relationship with Albourne Partners was useful and also made us more comfortable looking at new managers and smaller funds as well. They have moved to remote operational due diligence in most cases, and reading their reports I find they got access to people and documents as if they were on site”.
“In the spring of 2020, we temporarily paused new allocations not only due to market volatility, but also due to uncertainties about our liabilities for credit insurance on Swedish industrial companies. In fact, we did not experience an increase in claims. With a perfect crystal ball, of course we should have increased our risk asset allocation”.
A Lower for Longer World;
“We haven’t made any major changes in our cash management program due to the lower rates, we are luckily not paying negative interest rate on our accounts. Of course, we felt the pain in our hedging program a couple of years ago when we had a large interest rate differential to the US, but today that’s not a big issue anymore”.
“The low yield environment is always a present topic and challenge nowadays. We need to think a lot of how we position the portfolio to continue to deliver returns in line with our targets. We need to find the right balance between liquidity and returns to ensure that we can meet our liabilities over time. With a large fixed income allocation and an equity market on steroids with extremely high valuations I believe alternative investments can have an important role here”.
Spreading risk rather than timing market cycles;
“However, when committing to new private markets investments in this market environment we need to be mindful of where we are in the cycle. We are not trying to time the major market cycles though, but instead spreading our commitments evenly over different vintages. What we might do is to adjust if we go in early at a first closing or wait until we have a better visibility of the portfolio before committing. There are also sub-sectors within an asset class that we can find more or less attractive in different times, for example secondaries within private equity or structured credit within private debt”.
Strategic Asset Allocation; shifting from fixed income into alternatives, illiquid credit and real estate
“We are generally holding less cash and have also shifted from fixed income into alternatives. We have grown alternatives from 12% to 25% over the past five years, including private debt, private equity and infrastructure. Equities have been steady around 30%”.
“In private debt we are mainly in senior secured direct lending and are happy with yields of 6-7%. We also have some satellite exposure to structured credit which can provide some yield pickup.”.
“We are continuously watching for possible downgrades and defaults even if fundamentals do look strong. Investing in Swedish corporate debt and equities may duplicate some of our credit insurance liability exposures, but there are also internal limits per company”.
“In private debt and private equity, we diversify by managers and vintages, rather than timing the market. We are growing and building out private equity and were able to invest in some funds within secondaries, both LP interest and GP lead, that got access to attractive discounts in 2020”.
“In real estate, we may add to domestic Swedish real estate. We still like residential real estate, and within retail assets there were some subsectors that showed persistent and defensive characteristics in 2020”.
“In liquid hedge funds, we are diversified across CTAS, global macro, fixed income relative value, equity market neutral, long/short credit and volatility. The majority of managers are based in Europe, in London, Sweden and Switzerland. I have a long experience covering the hedge fund industry from my time at PRI, but also before at AP3 and RPM. Some of the funds I’ve been following for many years but we also have some newer and smaller funds in the portfolio as well”.
Tactical Asset Allocation
“We can be somewhat tactical within our diversified portfolio of hedge funds. For instance, last year we added to macro and CTAs and reduced long/short equity”.
“We have never been very active on the tactical asset allocation side, though we can try to take advantage of temporary dislocations with smaller decisions”.
In House versus External Management
“Currently our only in house management is Swedish equities, partly because we only have three people in the team. We would need to grow the team to do more internally”.
Active versus Passive Management
“All investments are actively managed because we believe that active managers can monetise on temporary inefficiencies in markets. We also believe in our capability of finding managers who will perform and justify their costs. If we look at our internally managed Swedish equity portfolio, the manager have been very successful and have a long track record of outperformance. Both our internal and external strategies have beaten their benchmarks over time”.
ESG – Policies
“Our main ESG priority is to invest in companies with long term financial stability, that can generate stable long term returns from sustainable, repeatable business models. We only invest in companies following the OECD guidelines for multinationals and the UN Global Compact”.
ESG – coverage
“We have started a large internal project on ESG and sustainability, which will apply ESG over the whole organization – for example considering our credit insurance business as well as our asset management, where it will apply to all asset classes”.
ESG – engagement
“Due to PRI (in most cases) being such a small owner of the businesses we invest in, we usually do not attend AGMs or vote. Exceptions of course are if there are any very specific questions we don’t agree with. However, we try to always have an informal dialogue on management and board level to affect companies in the right direction”.
“For external managers, they follow their own guidelines. These guidelines and the managers’ own ESG policies are of course a very important part of our due diligence before an investment”.
ESG – data and reporting
“For due diligence on external managers, we rely partly on Albourne Partners reports, which include a separate section on ESG, and we have sat in on their due diligence meetings”.
“Depending on future reporting requirements, we might need more transparency from our external funds in the future, probably agreed on through side letters. We are today evaluating a couple of different external system providers that can increase our coverage and improve our reporting capabilities.”.
“We will soon start the GRI Global Reporting Initiative, and published our first annual Sustainability Report in May 2021 for 2020”. The Hallbarhetsrapport 2020 is currently only in Swedish. It highlights 6 of the 17 UN Sustainable Development Goals (3,4,5,8,9 and 12) as areas of focus, and has a timeline for reporting out to 2023, including annual Sustainability reports and portfolio screening.
“We are also looking at the EU taxonomy to work out what types of reporting may be needed. It is yet a bit unclear what the outcome will be and exactly what type of reporting that will be required from us as an institutional investor”.
Solvency II Framework and Reforms
“Solvency II is not a serious constraint for our investment strategy. We have a big surplus under Solvency II. Our assets of SEK 33 billion are 5.4 times our capital requirement of SEK 5,8 billion per December 31st..”
PRI uses the standard Solvency II model, but PRI CEO Jonas Jonssson argues that “as it is currently structured, in some respects the standard formula is not fair to our business. Consequently, since the implementation of Solvency II, PRI has used supplementary internal capital metrics to ascertain the company’s financial strength”. This leads to capital add-ons. This capital requirement will increase from SEK 5.8 billion to SEK 12.1 billion on June 1st 2021, following a decision by the Swedish Financial Supervisory Authority, Finansinspektionen.
