Covid 19 and beyond
Last week we presented our Responsible Ownership report to our Nordic portfolio companies at a webinar. It was the second year we gathered representatives from large corporations such as Sandvik, Volvo, Investor and many more. We have found it to be a a good way of setting the direction and pathway for the coming year by specifying our areas of focus and priority.
At the outset of the abovementioned webinar, I spoke with my colleague Staffan Ström, about three themes going forward that I deem important now that we are starting to look forward and beyond Covid-19. The pandemic will still be a major issue, but now with more emphasize on structural consequences for societal and economic changes.
Covid and the investment climate
Since March of 2020 we have seen the stock market bounce back strongly, which continued in the first six months of 2021. Our portfolio of appr. USD 130 bn makes us one of the 25 largest pension funds globally. Our returns amounts to 9.7 per cent on average during the last five years at a cost of 9 bps.
But we are potentially standing before a major shift.
During the past thirty years we have seen the interest rates drop, the past couple of years especially driven by the central banks crisis management. This has fueled the returns on risk assets. These market developments have overall been beneficial for the classic 60/40 portfolio.
The high valuation of basically all risk assets presents a challenge for future return generation in the light of anticipation of higher inflation driven by for example energy prices and supply chain bottlenecks. This, in combination with expected rate hikes makes the future uncertain.
A couple of years ago, we therefore made the strategic decision to shift our portfolio towards an allocation of alternatives equivalent to 20 per cent of total AUM by 2024. During the last two years we have increased the allocation towards alternatives from appr. eight per cent to 12,5 per cent. It has been done with discipline with regards to expected risk adjusted returns and cost efficiency.
Covid and the sustainability momentum
In the build back phase from the major shutdowns we saw during the pandemic, there is a strong focus on sustainability and transition. This creates good investment opportunities for us given the longtime horizon of our investments. Long-termism goes hand in hand with sustainability.
However, there is a current discussion on stakeholder value that I find problematic. Stakeholder value is a precondition for shareholder value. However, the proposal from the European Union on Sustainable Corporate governance runs the risk of putting some of the fundamental aspects of market economy out of play. The risk is that it results in difficult conflicts of interest situations. I went through this in a previous post and opinion piece (in Swedish) if you are interested in reading more in detail about this.
This does not mean that we, in our stewardship, don’t take stakeholders into account. Quite the contrary. We need to see more reporting, especially on emissions and that our portfolio companies set Science Based Targets.
Covid and the role of the office
We are a large owner of real estate, and 2021 saw the birth of the company Alecta Real Estate, a fully owned, but specialized real estate company for our Swedish properties. We own property for approximately 45 billion SEK, and 25 percent of this is office space situated in Stockholm, Gothenburg and Malmö.
The million-dollar question is of course: what is the workspace of the future? How do employees want to work? After a period of 18 months when offices have been very empty, it is hard to say. We do not know the answer, but to find out we started AIM (Alecta Insight Meetings). It is a discussion arena where we gather representatives from Sweden’s biggest corporations, many of which have offices in Alecta-owned properties. We have already seen the first pilot project come out of AIM – One Day Office. You can read more about this on our brand-new site for Alecta Real Estate (Swedish only).
These are broad strokes of what I believe the longer impact of Covid will be on our business. We need to figure all these issues out in cooperation with our customers, portfolio companies and all of my fantastic co-workers. It is hard to say where we will end up, but for the first time in a long time, we can start to imagine a world where the pandemic does not dictate everything.
We have noticed that my blog is as read outside of Sweden as it is here in the northern parts of the world. Hence, I am writing this post in English. I hope the message comes across to both our Swedish readers and our International.
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