“When the regulations were introduced, they were modern, good and had few restrictions compared to what previously had been the case. But the constant changes in the financial markets require a continuous review of the investment rules. It is important to have a system with a built-in reassessment where we as investors are being listened to and our opinions taken into consideration,” says Björn Franzon, deputy managing director of AP 4.

“All the investment regulations should be reviewed on a regular basis. For example, infrastructure did not really exist as an asset class when the regulations came into force and neither did commodities,” says Bengt Hellström, head of alternatives at AP 3.

Some of the frustration has centred around the restrictions for making investments in infrastructure. In the current legislative framework, infrastructure is defined as private equity, an asset class that the first to the fourth AP funds can have a maximum of 5 per cent exposure to.

AP 3 has come closest to the 5 per cent limit and has thus taken the lead in forcing a change. Its CEO Kerstin Hessius has several times voiced her opinion that the rules must be revised to prevent the AP funds from missing out on good investment opportunities. AP 3, which is the only AP fund to have so far taken on infrastructure, is also keen to increase its exposure to the asset class.

“It is unfortunate for two asset classes – private equity and infrastructure – with such different characteristics to compete,” says Mr Hellström.

“Infrastructure is a long-term investment with risk-adjusted returns, which is well suited for long-term investors like us. We would like to be able to take on the asset class in a larger extent than what we currently are allowed to do,” says Mr Hellström.

So far, AP 3’s infrastructure investment only consists of a few smaller commitments.

“We have mainly been looking to get experience of the asset class, but would like to have a geographically diversified infrastructure portfolio. No investment opportunities have yet emerged in the domestic market,” says Mr Hellström.

Opening up for a larger infrastructure allocation would also enable the AP funds to invest in big Swedish infrastructure projects. Public private partnerships in the infrastructure sector have not yet been allowed, but there are indications that the new centre-right government could open up the possibility. The minister for infrastructure, Åsa Torstensson, has, for example, expressed strong support for public private partnerships.

Other investment rules include having at least 30 per cent invested in bonds and no more than 70 per cent invested in equities. The funds are also banned from holding more than 2 per cent of shares of Swedish listed companies. It can neither own more than 10 per cent of the votes in a single listed company or more than 30 per cent of the votes in an unlisted company. AP funds are further prevented from investing in commodities.

“The 5 per cent limit on private equity is very narrow, but you can also question the 30 per cent required bond allocation, because of our nature as buffer funds. We think that it might be too high and that there are definite reasons to look into that,” says Mr Franzon.

Another possible asset class that could be up for revision is commodities, which is currently excluded as a direct investment.

“We want all the regulations to be reviewed, but have at the moment no opinion on commodities. Unlike infrastructure, which we have been able to get exposure to and experience of, to a certain extent, through our private equity portfolio, commodities is an asset class we have yet not been able to touch,” says Mr Hellström.

According to AP 3, the initial response from the government has been positive, but any adjustments to the investment regulations would take time since it requires changing the law. The main support has come from the Centre Party, which takes part in the four-party government coalition.

Roger Tiefensee, the Centre Party’s spokesperson for financial matters, believes that the current investment regulations are outdated and that is having a negative effect on AP fund returns.

“Our point of view is that opening up the investment regulations would give way to better returns and allow the funds to take on interesting investment opportunities that arise. It would for example enable the funds to take on larger infrastructure investments, which is a safe investment with safe returns. We think it would be a great idea for the AP funds to finance Swedish infrastructure projects,” says Mr Tiefensee.

He added that raising the 5 per cent roof on private equity would be the easiest solution and would solve a lot of the problems.

“I would say that there definitely is support in the government coalition, but changing the investment regulations have not yet been formally discussed,” says Mr Tiefensee.

CL

• Minimum of 30 per cent invested in bonds
• Maximum of 70 per cent invested in equities
• Maximum of 5 per cent invested in private equity
• Maximum of 2 per cent holdings in a company listed in Sweden. 
• Maximum of 10 per cent of the votes in a single listed company
• Maximum of 30 per cent of votes in an unlisted company
  

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