Pension funds are not high-profile investors but they do command substantial assets. A case in point is Alecta: Sweden’s largest pension fund manages roughly SEK685 bn ($82 bn) for 2 mn individuals and 33,000 corporate clients, with SEK285 bn in equities.
Arne Karlsson is a buy-side analyst at Alecta, covering capital goods and industrial stocks. He joined the pension fund in 1995, following roles at Swedish investment bank Öhman Fondkommission and United Securities in London. He began his career at Sparbanken, now known as Swedbank, and has also worked as an auditor.
How does your investment approach compare with other Swedish pension funds, like the AP range and AMF?
Compared with the AP funds, Alecta has no index portfolio. Instead we have a focused and 100 percent internally active-managed portfolio. There is less of a difference [between us and] AMF.
How many in-house investment professionals are there at Alecta?
There are 30-35 people covering equities, fixed income and real estate.
Do you divide up sectors and geographies?
We split sectors in equities among analysts but we have a global mandate, although our focus is mostly on the developed markets of Europe and North America.
Of the $80 bn of assets at Alecta, what percentage is managed internally?
All our assets are managed internally – we don’t outsource anything.
What assets do you have in European equities?
Approximately 80 percent of $33.5 bn, so about $27 bn in European equities.
And in US equities?
Close to 20 percent. Depending on the exchange rate, we have about $7 bn invested in US equities.
What about emerging markets?
We don’t have any emerging market equities just now.
Do you have an investment style: value, growth, GARP, and so on?
We have no particular investment style. We are more a buy-and-hold investor. We like quality companies – they can be growth, they can be value. Regarding quality, we have our own checklist and look at management, corporate culture, markets, profitability, and so on. We try to think like Warren Buffett – we are a long-term investor.
Which screens do you use? How do you know if you want to meet a company?
We meet the firms we hold. Besides that, our analysts know fairly well what could fit our portfolio in terms of quality but they also search for new ideas. If we don’t know a company well, we aim to get some information about it and the business, and take it from there.
Which benchmarks do you use?
We have composed our own index through a mix of relevant indexes from the markets where we are active, to compare how the portfolio is doing.
Do you have a target price when you buy a stock, such as 20 percent upside, for example?
We do our research and come up with a valuation. If a firm has the right quality, we think it’s worth having a look at. The less quality and the more uncertainty, the greater the upside has to be, but there’s no specific number for upside to trigger our investment.
What’s your average holding period?
We have patience for at least three to five years, but some holdings we’ve had for 10, 20 or 30 years. If they still have upside potential we tend to hold them. We have been invested in companies that became fully valued or, after learning more about them, weren’t the quality we thought; then we have divested.
What’s your average market cap? And your cut-off?
Our minimum market cap cut-off is $2 bn-$3 bn.
Typically, what size position do you take?
It depends on the portfolio. For example, we have a mid-cap portfolio and a position at the start could be very small, but we tend to think in terms of a $50 mn-$100 mn position. Factors like liquidity can hold us back but we don’t want lots of small positions we don’t have time to focus on. In the US, for example, we have around 25 names, so it’s a concentrated portfolio.
Are there any sectors you won’t invest in?
We tend to avoid sectors such as tobacco and defense.
Are there any sectors or themes you don’t favor?
Some sectors we don’t really have a good feeling about and have avoided for some time – utilities, for example. The more companies grow, the better it is. We are also not so keen on highly cyclical industries like steel so it would have to be an exceptional case for us to invest.
Does a company have to be profitable?
Yes. If there are no profits, it would have to be an extremely strong case to convince us there was going to be a turnaround.
Can you name and explain some recent purchases?
Speaking for my sector, Rockwell Automation in the US is an extremely strong company, focused on one sector – automation – with an extremely good track record and respected in its industry. It has promising future opportunities. We met with management and got a solid impression. It flashes green all over.
We hold John Deere as well. It has a long history and extremely good positions – probably the best position – in its markets, and we like how it thinks. It has some headwinds currently but we think that is priced into the stock, so it’s okay.
What about any recent sales?
We haven’t sold anything completely from my sector, but we recently sold some minor holdings as they were too small and we cleaned up the portfolio a little bit. We’ve also sold a couple of things on valuation recently.
Do you have to meet management before you buy a stock?
Our ambition is to meet management before we buy a stock but sometimes we invest a little and then initiate a process for how to meet management.
Where do you like to meet management?
Where does not matter that much. The best thing is to meet management teams one-on-one in their office or where they have operations. If they come to us in Stockholm, that’s also fine.
At conferences, meetings can be of lower quality as management teams are busy: they meet many investors and are not as relaxed. If we are in a group meeting, we find it hard to put forward our type of questions, which are boring long-term questions compared with a hedge fund that wants to have a look at the quarter. So we prefer one-on-ones.
Typically how many companies (US and European) do you meet a year?
We probably have 300-400 meetings with companies every year, mainly with companies we have a position in, but also new companies. We own 25-30 US names and between 80 and 100 European names.
Why should corporates target pension funds such as Alecta?
As an investor, we are long-term holders; we care about how the company is managed. The better it is managed, the stronger and more promising the future is and the more likely we are to stick with our holding – so our long-term profile is clearly our best selling point.
Gill Newton is a partner at Phoenix-IR, an investor relations consultancy
This article appeared in the summer 2015 print issue of IR Magazine
