With a rather unorthodox view on investment, Kåpan Pensioner, the €3.7bn pension fund for Swedish government employees, is pursuing a rather bold investment strategy – and is currently in the process of boosting its already widely diversified alternatives portfolio from 15 to 25 per cent.

“We already invest in all kinds of quirky assets,” says Gunnar Balsvik, the fund’s CEO for the past four years. Its inspiration comes from beyond its Swedish borders.

“Sweden is so competitive and the Swedish market is somewhat conservative with everyone doing the same thing. We are trying to step aside and look at markets that are not as benchmark driven as us. We get our inspiration from the large foreign funds, like the Dutch, which we rate,” says Mr Balsvik.

Alternatives boosting returns

And the strategy has so far certainly paid off. In 2006, Kåpan returned 8.8 per cent and since 2001 has averaged returns of 5.6 per cent, compared to returns of 2.9 per cent returns for the big insurance firms.

It also has the lowest administrative expenses compared to other pension companies with costs of only 0.10 per cent. Its administration is outsourced and the investment department only has seven members of staff.

The boost to alternative assets, which is at the expense of its bond holdings, will include an increase in a wide range of alternatives. Mr Balsvik believes the fund will have at least 3 per cent in each alternative asset class within one to two years.

“We will not only buy hedge funds but are trying to get a diverse range of assets with a decent stability as well as better returns and less volatility. We believe there are good alternatives out there to bonds, such as US life insurance products,” says Mr Balsvik.

Its exposure to US life insurance products is made up of three investments.

“We started about two years ago, but only have about 1 per cent exposure. It is a big market in the US and many Dutch funds are investing there. It gives us good diversification, since it is not correlated to anything else at all. Really, it is an interest rate instrument,” says Mr Balsvik.

Kåpan has a traditional single hedge fund portfolio with about 3 per cent dedicated to the asset class. It also has a commodities portfolio of about 1 per cent, which it aims to increase to 3 per cent.

Spotting commodities opportunities

“Our commodities investments are under development and we are trying to find ways to take advantage of the benefits that exist in the sector. On the one hand, there are large arbitrage possibilities and on the other hand, you have to be good at trading with derivatives.

“We have looked at the large indices, but are not convinced that they are working and believe they might be too volatile,” says Mr Balsvik.

The fund is also planning to raise its exposure to timber from 2.5 per cent to 3 per cent. It made its first investments three years ago and is looking to invest outside the established markets, mainly in Africa, South America and New Zealand.

The US market is regarded as saturated and lacking potential. Kåpan invests in two global funds and has one large investment in the Swedish forestry company Bergvik Skog, where it recently became the fifth largest owner.

Unexpected timber growth

“We have bought a lot of timber which has so far exceeded expectations, with returns of up to 20 per cent a year, although I believe around 10 per cent really should be what you can expect,” says Mr Balsvik.

It also has a 1 per cent exposure to private equity within its equity portfolio and a further 2 per cent committed to unlisted stocks. But Mr Balsvik admits that there are problems for smaller funds to get good quality exposure to the asset class.

"We are too small and unknown to get good access to the best private equity opportunities,” Mr Balsvik explains. Pre-2005 regulations also prevented certain Swedish funds from taking on the asset class.

But the somewhat bold investment strategy is also based on a more philosophical view on what a pension fund’s task is all about.

“Philosophically, we are trying to add value for our members. Anyone can buy equities and bonds, but we are trying to create an added value in keeping the money with us through our expertise. As a pension fund, the aim should be to provide something that the individual cannot achieve on its own,” says Mr Balsvik.

“Equities are so volatile and we have a duty to manage the assets in a responsible way. Our equity portfolio also consists of an equity option portfolio, however, which has been doing very well,” Mr Balsvik continues.

A substantial part of equities, about 10 per cent, is invested in emerging markets, which is quite high for the Swedish market.

“I believe emerging markets have good potential and that it is one of the most interesting areas to invest. After all, that is where the growth is. Africa in particular is a very exciting region to invest in,” says Mr Balsvik.

The fund is not using any consultants, despite having 70 per cent of the portfolio internally managed and having only four portfolio managers.

“I prefer my employees to make the mistakes – then at least I have someone on hand to blame if things were to go wrong,” he says.

Getting in on US life insurance policies

In the US, the buying and selling of life insurance policies has evolved into a big market. Investors buy them from individuals and then continue to pay the premium, and in return receive a payment once the policy holder dies. The individuals, on the other hand, get a lump sum and do not have to keep paying the premiums; however they forego the rights to a pay out when they die. The investments are usually made collectively, but some Dutch funds, for example, are buying the policies directly.

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