Hypoteket, one of the main challengers in the Swedish mortgage market has, with one of Sweden’s national pension buffer funds as anchor investor, recently launched a new offering - a mortgage fund with investment grade rating (Baa2 with Moody’s).

“In investor talks we learned there was an interest to invest in our residential mortgages given there would be an investment grade credit rating in place, along with a listing. It was a challenge we decided to take on, and in continuous talks with our investor on one side and Moody’s on the other we have managed to navigate through to a product that meets the standards of all participants involved - not least our own” comments Carl-Johan Nordquist, co founder of Hypoteket and CEO of Hypoteket Mortgages.

In developing this new product, rather big steps have been taken in the direction of a more traditional fixed income instrument. This is a natural transition as a mortgage fund investment really is a quite typical fixed income investment by most means, but one where investors have struggled to place it in that investment bucket due to some of its characteristics.

“A mortgage fund is a great product for many life and pension-like investors when compared to most traditional investment grade fixed income securities. Unfortunately, as they are packaged in a somewhat alternative configuration, some of them have had a hard time deciding how to fit us in their current setups. Yield has typically been on the low side to qualify us for the alternative mandates, whereas illiquidity and/or the alternative investment fund model has excluded us from the fixed income money” says Johan Hasselblad, Head of Funding at Hypoteket. “It is a shame, as it really provides benefits to most fixed income portfolios in terms of both diversification and yield enhancement in the current interest rate regime”.

The new fund was recently launched together with an initial investment commitment from one of the national pension funds and is now open to welcoming more investors, who see the benefit of picking illiquidity premium from Swedish residential mortgages, keeping more for themselves and giving less to the large commercial banks.