At the beginning of this year, the Third Swedish National Pension Fund (AP3) received an initial portfolio of SEK 134 billion. As of 30 June 2001, the value of the portfolio totalled SEK 131.5 billion, including a net inflow of pension contributions amounting to SEK 2.1 billion.
The return on capital for the first six months of this year, adjusted for net capital inflow, amounted to -3.4 per cent. For the liquid part of the portfolio, which excludes real estate, the return was -3.6 per cent, compared to a return of -3.4 per cent on the Fund’s weighted benchmark index.
The return on the Swedish equity portfolio amounted to -10.8 per cent, which was 1.6 percentage points better than the benchmark index. Other portfolios have generated returns at about the level of their respective benchmarks. The entire negative contribution to the Fund’s active return can be attributed to tactical asset allocation, where the Fund has maintained an overweight position in equities during most of this year.
The Fund’s new mandate since the beginning of 2001 is to manage its assets with the aim of creating maximum benefit to the Swedish national pension system.
– “Our asset/liability modelling (ALM) study showed that a changed asset mix would improve the probability of favourable outcomes for the pension system, while diminishing the probability of unfavourable outcomes. I am satisfied that the necessary transition of the assets under our management is now completed,” says Tomas Nicolin, CEO of AP3.
The choice of asset mix in the Fund’s benchmark portfolio is based on an in-depth analysis. In a stochastic simulation model, the Fund’s analysts have studied around 100,000 possible scenarios for the Swedish pension system, looking 15-25 years ahead. The conclusion is that a well-diversified portfolio of 49 per cent equities, 37 per cent fixed income, 7 per cent real estate and 7 per cent index-linked bonds provides an asset mix that fits the Fund’s commitments as a buffer fund in the pension system. Around 45 per cent of the reference portfolio consists of domestic assets, while the rest is invested abroad. Since Swedish government bonds dominated the Fund’s initial portfolio, an extensive transition process was required in order to attain this desired asset mix.
Share of currency risk 8 percent at mid-year
The share of the Fund’s assets exposed to foreign currency risk amounted to 8 per cent at the end of the first half of 2001. The Fund’s transition process has led to an increase in its holdings of foreign assets in the order of SEK 60 billion. Most of these holdings are hedged against currency risk. During the first half-year the Fund’s net sales of Swedish kronor have totalled SEK 6 billion.
The Fund’s reference portfolio contains 55 per cent foreign assets. AP fund investment rules set an upper limit for foreign currency exposure during 2001 at 15 per cent of the portfolio. The fund’s assessment of optimal hedge ratios showed that it was appropriate to hedge 100 per cent of foreign bond holdings. The legal restrictions then implied a hedge ratio for foreign equities of at least 63 percent and at most 100 percent. The Fund decided that a hedge ratio of 80 per cent was well-balanced and ensured flexibility in a situation with a volatile SEK market.