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SPP moves in as banks move out

Sweden’s SPP Livförsäkring, one of the country’s biggest life and pension providers and part of the Norwegian Storebrand Group, is shifting its allocation in favour of more illiquid assets to escape enduring low interest rates.

The fixed income allocation at the fund will be reduced and assets portioned to private debt markets in Europe and the US in long-duration loans.

“This suits our liabilities and the long-term impact of Solvency II,” explains Erik Callert, chief investment officer at the Stockholm-based provider, in reference to the new capital requirements which govern insurers and result in “every investment having to now be analysed from an economic and a regulatory perspective.”

Callert describes the exodus of banks that used “to own” the private debt market as a “great opportunity that we can take it on”.

SPP is in the process of choosing external fund managers to run the private debt allocation in a departure from its usual in-house management via parent company Storebrand Asset Management.

The move into the loan market is a consequence of the challenge of meeting SPP’s guaranteed returns.

Today this sits at 1.25 per cent, a long way from the guaranteed returns of the 5.2 per cent SPP promised its policyholders in the late 1990s.

Low interest rates have forced the fund to take on an element of risk, where it has found illiquidity pays off.

“We saw it first in our real estate exposure that earned high and stable returns. We are looking at infrastructure now, and there is a lot of demand for infrastructure in Europe particularly.”

SPP offers two main savings products: a SEK50 billion ($5.8 billion) growth portfolio without guarantees, and the legacy SEK90 billion ($10.5 billion) portfolio that Callert runs.

In the legacy portfolio the assets are split between an 80 per cent allocation to fixed income, a 10 per cent equity allocation and a 10 per cent allocation to real estate, managed internally at Storebrand Asset Management.

The 10 per cent equity allocation, steadily reduced by 40 per cent in response to the financial crisis and a subsequent deliberate strategy to diversify risk, now has a quarter in externally managed private equity (where Callert also likes the “illiquidity risk premia”), a quarter in emerging markets, and the balance in developed markets.

The public equity allocation has an ESG enhancement that means the fund only invests in “top performing” stocks derived from in-house sustainability ratings.

In what Callert describes as a “unique selling point” a team of eight Storebrand analysts produce a sustainability rating for companies listed in the MSCI All Country World Index according to their ESG, financial robustness and how well those corporations are positioned for the future.

The fixed income allocation is divided into thirds, portioned to government-guaranteed bonds, asset-backed loans like Swedish mortgage bonds, and corporate bonds. Here the allocation is split equally between Swedish corporate loans and northern European corporate loans.

“The portfolio has done very well since its inception in 2008 when we began our move out of equities into fixed income,” he reflects.

“But now returns from the portfolio are more difficult. We notice how spreads have narrowed over the last five years and we need to find alternative risk premia to fund our guarantees.”

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