EUROPE NEWS: Buffer returns

National Swedish ‘buffer fund’ Första AP-Fonden wants global diversity in its real estate portfolio. Here, head of real estate Tomas Svensson explains the progress so far

PERE: You joined AP1 one a year ago from Norway’s Storebrand group. What was the shape of the real estate portfolio you inherited?

TS: We basically had only holdings in Sweden. Together with the other AP funds, we own the largest property company in Sweden, Vasakronan, and we have created a residential property company, called Willhem. I was hired to be responsible for the real state portfolio, but primarily the focus has this far been to make a push outside of Sweden.

PERE: Presumably, the new global strategy is to do with diversification and maybe also enhanced returns?

TS: There is only so much one can own in your own country before you get too dependent on one market. The basic theory of course is that if one buys at the same yields somewhere else, risk-adjusted returns are higher because of diversification. With that said, there will always be a home market bias due to the fact our liabilities are in Sweden and it is Swedish inflation we need to cater for.

PERE: How are you developing a global portfolio?

TS: The way we started this three years ago was to set up two global listed mandates. They have served their purpose and have given us some initial exposure, but the current strategy is to shy away from the listed sector mainly because of the too-strong correlation to the equities market when times get uncertain, which is then counter-productive for us. We won’t increase the listed side, but rather work with listed companies on tactical opportunities. In terms of our long-term strategic holdings, they should be unlisted.

PERE: So you have a strategy to diversify your holdings outside of Sweden. Where in the world are you seeking to invest, and why?

TS: Primarily Europe and Asia. Europe because it is the market that is most familiar to us, and Asia because much of the growth is there and it has a lower correlation with Sweden than the US. When you have ‘long money’ as we have, although it is not necessarily transferring into superior real estate returns, it is hard to ignore Asia where much of the world’s growth is taking place. We will also continue to invest in Sweden, primarily in new sectors and higher up the risk curve, but we won’t have all our holdings here.

PERE: One year into the strategy under your leadership, has Första AP-Fonden made any commitments yet as a limited partner, and if so, what have you invested in?

TS: As we are seeking yield as well as capital appreciation, we have made commitments to a fund investing in Australian offices, Chinese residential development funds and we have also committed to a pan-Asia Pacific fund of funds, in order to get exposure to managers we wouldn’t find ourselves. In Europe, we have formed Cityhold together with AP2, which to date has closed on two deals in London. We have also struck a joint venture deal in the UK in the opportunistic space.

PERE: Is the idea to become a small limited partner in many real estate funds, or participate as a large investor in a smaller number of vehicles?

TS: We are looking for somewhat large mandates. We would not be looking into investing in too many different funds, but rather to stick to a few managers and make larger commitments. We are in a space where we are often among the biggest, if not the biggest investor in a fund. Those that go any larger than we do tend to stick to joint ventures and club deals.

PERE: That is a huge trend right now, isn’t it? What is your view on the fund model and alternatives to the traditional closed ended commingled vehicle?

TS: It is interesting because the manager you are paying for is not at the end of the day really calling the shots, it’s your fellow investors. Many investors will learn that lesson the hard way. I am an advocate of the fund model and I don’t think things like club deals and joint ventures are ideal for everyone. I don’t think they are necessarily the solution to many of the problems we have seen either. I am not saying we won’t do them, but we are certainly not only doing that. For us, it would be too time consuming.

At a glance
Name: Första AP-Fonden
Headquarters: Stockholm
Description: In May 2000 the Swedish National Pension Fund (AP Fund) was reorganized, and four new buffer funds including AP1 were given new investment rules in January 2001 assigned by the Swedish Parliament to manage the Swedish people’s pension funds.
AUM: €25bn*
Real estate AUM: €1.6bn
*as of June 2012