Sweden’s AP1 hands $400m high-yield mandate to Hermes Investment Management

Hermes Investment Management has won a $400m mandate from Swedish pension giant Första AP-fonden (AP1) – the first of three external managers to be announced under changes to the SEK323bn (€33bn) buffer fund’s high-yield credit strategy.

In June, AP1 announced the initial results of a tender put out in December after a decision to expand its high-yield investment strategy from US-only to global coverage. As well as Hermes, the following external managers were approved: Brigade Capital Management; Capital Four Fondsmæglerselskab; Legal & General; M&G; MacKay Shields; Morgan Stanley Investment Management; Neuberger Berman Group; Nomura Corporate Research and Asset Management; Shenkman Capital Management; TOBAM; and Wellington Management.

“The selected managers will give the fund good flexibility and portfolio diversification together with a high expected risk-adjusted return net of costs,” AP1 said at the time. “The managers complement each other well in terms of investment styles, regional expertise as well as risk profiles and will thereby contribute to the diversification of the portfolio.”

But Hermes, a dedicated responsible investment house, has become the first to be awarded a mandate under the new strategy.

Tina Rönnholm, the portfolio manager responsible for external high yield investments at AP1, said Hermes and AP1 “share the same belief around our duty of delivering strong returns to our stakeholders, including considering the impact on society as a whole”. She added that “a very important part of our qualitative assessment of managers has always been to analyse how the managers integrate ESG issues into their investment process”.Unlike some other AP funds in Sweden, AP1 does not have any dedicated ESG mandates or decarbonisation targets.

“We take a holistic approach to ESG integration,” Rönnholm told RI. “We are not interested in thematic funds or best-in-class solutions, but want sustainability to be part of the managers’ core investment process and philosophy.”

One of the key reasons cited for Hermes’ selection was its method of pricing in ESG factors into all credit decisions. It does this in part by using its in-house ‘ESG dashboard’ which collates information on listed companies, and via its corporate engagement arm Hermes Equity Ownership Services.

Hermes was founded in the 1980s by the UK’s BT Pension Scheme to run its assets, and is still under its ownership. However, over recent years the company has shifted its focus to external management, and now around 70% of its £30bn of assets are run on behalf of third parties.
The overhaul of its high-yield strategy will not change the amount of capital AP1 allocates to external managers, but will mean some existing external managers may lose out on mandates. AP1 did not provide further details.
“We will fund only a few of the approved managers at this stage,” Rönnholm confirmed, adding: “We are currently onboarding two more managers” to be announced upon completion of contracts.
“During the last year we have working extensively with both existing and prospective managers around sustainability issues and we are very proud of the feedback we have received from the industry with regards to our efforts in affecting change in the industry around these issues,” Rönnholm told RI.