Manager Overseeing $54 Billion Says She's Looking for New Risks

(Bloomberg) -- As the global stock rally has many pondering just how bad the correction will be, Sweden’s AP7 pension fund is seeking out new risks.

The 430 billion-krona ($54 billion) fund is looking at diversifying its portfolio to include more small cap investments after reducing the leverage it takes since 2015.

“We seek diversification to get a better risk-adjusted return,” Ingrid Albinsson, the fund’s chief investment officer, said in a phone interview on Friday. “The reason for the diversification effort in the fund is to broaden the quite focused equity risk, market cap exposure, in the fund.”

Manager Overseeing $54 Billion Says She's Looking for New Risks

Stockholm-based AP7, which has more than 90 percent of its portfolio in the global stock markets, is the state alternative within the Swedish premium pension system. More than 3 million Swedes have their premium pensions placed with the fund, which largely follows the MSCI All Country World Index and doesn’t make any tactical bets on regions or sectors.

But it does use leverage to boost its investments. The fund has returned more than 20 percent on average in the past five years. That’s better than 98 percent of its peers, according to data compiled by Bloomberg.

Watching a fading so-called stock premium, or the expected excess return one can make on stocks, AP7 already a couple of years ago decided to lower its leverage to 125 percent, compared with its benchmark of 135 percent.

Historic Levels

Albinsson, who joined AP7 in 2011 after working at Swedbank AB and SEB AB for two decades, says that there’s now a risk that the “equity risk premium won’t materialize in line with historic levels. It could be lower, based on the strong development in the market in the past years.”

The fund, however, doesn’t take a view on “when or how this adjustment will happen” she said. There’s still potential for a “number of years” with weaker gains in stocks, she said.

AP7 Aktiefond increased its share in emerging markets last year and is evaluating options for implementing small cap exposure, according to Albinsson.

The fund is in the process of seeking “diversification both in terms of a broadening of the investment universe to, for example small cap, credits and a higher share of emerging markets in the portfolio,” Albinsson said. It’s also looking at adding new strategies such as “risk premium factors,” she said.

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