(Bloomberg) -- Sweden’s smaller asset managers face a Darwinian struggle for survival as major reforms slash the number of funds that savers can choose after a fraud scandal rocked the country’s $400 billion pension industry.
The Nordic nation, where stock investing is more of a national sport than the preserve of brokers, is tightening up rules on which fund managers can run pension assets generated by a mandatory 2.5% salary contribution from all working Swedes — a pool that’s expected to double from the current level of $200 billion by 2040.
The shift came after two high-profile fraud schemes involving Falcon Funds and Allra Pension on the Swedish pension platform. The scandal landed several of their managers in prison with yearslong sentences. In total 20 funds were detected as fraudulent on the system over a two-year period starting 2013.
It’s led to the demise of a system where any fund could apply to be on the platform, replaced by a procurement-only approach administered by a new agency, independent from the government. That means smaller funds specialized in managing pensions run the risk of closure, removing a key buyer of domestic stocks.
“We are going from 900 funds in 2017 to 450 currently,” said Erik Fransson, who leads the agency Fondtorgsnämnden, known also as FTN. “But this figure will likely go down further.”
While Fransson says there are still two years to run until all the funds are procured by FTN, the change has already contributed to a wider wave of consolidation in the industry as bigger asset managers wrestle market share from smaller rivals. Under the new regulations, a fund manager has to have assets of 5 billion kronor ($455 million) to be accepted onto the platform.
Last month, DNB Bank ASA announced it was acquiring all the shares of rival firm Carnegie Holding AB for about 12 billion kronor ($1.1 billion). There have also been major moves on the buyside, and earlier this year Ohman Fonder bought Lannebo Fonder with combined assets of around 250 billion kronor. A year ago Carnegie itself gobbled up smaller peer Erik Penser Bank, in part to strengthen the former’s asset management.
One fund no longer on the platform for European equities is Helsinki-based Evli Fund Management. “Some of the smaller players with significant parts of their AUM on there will have to rethink their business,” said Evli Managing Director Kim Pessala in an interview.
Pessala, whose firm bought Finnish rival Elite Alfred Berg Group in 2022, said the reforms provide yet another hurdle for those managers without scale. He also pointed to regulatory pressure, automation in fund management and the popularity of passively managed and index-tracking funds as further obstacles.
Fransson accepts the new procurement process is one part of the puzzle when it comes to consolidation in Sweden’s fund industry, “but we are not the main driver.” He added that the agency he oversees is powerless to help smaller managers get onto the platform.
To be sure, consolidation is a global trend sweeping the fund management industry since the end of the zero interest-rate era.
Still, the impact in Sweden could be that smaller companies find it harder to raise capital on the equity markets, according to Tomas Hellstrom, chief executive of Stockholm-based Odin Fonder. “Diversity will suffer and it could also lead to worsening activity on Swedish capital markets,” he said.
The bar for entering Sweden’s public equity market is set relatively low and the country has the most public companies per capita in all of Europe — in part thanks to small institutional investors willing to build stakes in firms that would be too small to be covered by larger players’ investment mandates.
“Our strength in the capital market is that we have had many professional actors,” said Jonas Strom, chief executive of investment bank ABG Sundal Collier, in an interview from his Stockholm office. “The financial eco-system here is more small-cap friendly than if you compare it with the rest of the world.”
For Fransson, the benefits of the new system outweigh the drawbacks. As well as tightening up the checks and balances to prevent fraud, the new system is designed to attract quality fund managers with tier one institutional pricing. “As an example we just finished the pricing for our global index funds at 4.6 basis points,” he said.
“At the end of the day, savers will have a better pension as a result of the new system,” Fransson concluded.
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