New mapping of the investment fund sector’s cross-border links

The Central Bank of Sweden, Riksbank, has published a staff memo entitled: „New mapping of the investment fund sector’s cross-border links“. The memo contains an analysis of the interlinkage of (Swedish) investments funds with other countries and jurisdictions. Such interlinkages primarily come through
– the investment of Swedish investment funds in non-Swedish assets (e.g. equities of high-tech firms);
– foreign investments in Swedish investment funds;
– the investment of foreign investment funds in Swedish assets (e.g. listed stock); and
– the investment of Swedish investors in foreign investment funds.
The report thereby looks at the scope of such interlinkages and the involved investments, and briefly summarizes potential risks that may arise to the Swedish financial market, including to Swedish investment funds, Swedish investors, and Swedish security issuers. The analysis thereby encompasses a period from 2005 through 2021, inclusive. Although all four of these connections are addressed in the report, the key focus lies, however, on Swedish investors’ exposures to foreign domiciled investment funds, the investment of Swedish investment funds in non-Swedish assets, and the investment of foreign investment funds in Swedish assets.
#### The key findings are presented below:
– Swedish-domiciled funds invest significantly in assets issued abroad. In fact, the exposure in Q2 2021 in terms of value of the investments was well above 50% of a fund’s total value (on average);
– Investment managers show a preference for European and US equity securities, especially in banking, healthcare, and the US tech industry;
– There are substantial investments in other investment funds;
– Swedish investors invest heavily in foreign funds, constituting over 25% of total fund sector investments;
– A great portion (about 1/3) of such investments involve investments in „private capital“ funds (typically not open for retail investors such as private equity or venture capital funds) located outside the EU. Key investors are thereby Swedish social security, pension funds, and insurance corporations;
– The by far greatest number of foreign funds offered in Sweden are domiciled in Luxembourg (over 3,500);
– Many of these funds are managed by Swedish fund managers;
– A large portion of Swedish debt securities are held by foreign investors (over 52%);
– The proportion of investments in Swedish equities is significantly lower (less than 20%);
– The largest group of foreign domiciled investment funds holding Swedish assets come from the U.S.
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Having considered the results of the analysis, the author concludes that there is a large potential for risk stemming from these investment pattern, particularly with respect to foreign investments in Swedish debt assets and Swedish investments in assets located in countries where investment laws may not be as stringent as they are in Sweden or the EU in general. Another concern is the investment focus on specific industries, such as the banking sector. Therefore, the author notes that further analysis should be performed to quantify those risks, especially under critical market conditions as the ones that have occurred in the past three years.